Union Budget 2024: Sustaining the India story

There was a lot of interest in the Budget from global investors. How would the government react to its weaker electoral performance? Would we see a lurch towards populism as has been seen in the recent state Budgets? Would we see some new reform measures in line with the transformational change rhetoric from the government pre elections?
 

The finance minister has maintained her fiscally conservative stance and thankfully shows no change in economic direction. The quality of expenditure continues to improve. Capital expenditure (capex) continues to be prioritised. When we compare this Budget with the figures given in the Interim Budget of February, some trends are clear. Revenue receipts for FY25, as expected, are higher by almost Rs 1.28 trillion over the figures presented in February 2024, but this is entirely due to higher non-tax revenues of Rs 1.46 trillion [largely the Reserve Bank of India (RBI) dividend]. Net tax revenues, surprisingly, are shown lower by Rs 18,000 crore (entirely due to the higher share of states by Rs 27,500 crore). So how was this revenue windfall of Rs 1.28 trillion planned to be spent? Revenue expenditure is budgeted to be up by Rs 54,744 crore over the interim numbers despite interest payments falling by Rs 27,500 crore. So revenue expenditure ex interest payments is up by Rs 82,244 crore, only 3.33 per cent. The balance of the revenue windfall was used to lower the fiscal deficit by Rs 72,182 crore.
The fiscal deficit target was cut to 4.9 per cent of gross domestic product (GDP) from the original Interim Budget target of 5.1 per cent. So yes, there was a revenue windfall for this year but more than half of it was used to lower the deficit, rather than increase revenue expenditure. All the fear of the government turning populist has been just plain wrong.
 

None of the windfall was used to increase capex, a possible acceptance that there are limits to effective absorptive capacity by the government. Capex has trebled in the last five years, and is now likely to grow slower from here.
 

Looking at the fiscal deficit, we had an 80 basis point correction in FY24 (6.4 per cent to 5.6 per cent) and are now targeting another 70 basis point correction in FY25 (5.6 per cent to 4.9 per cent). Despite this contraction, we have been able to maintain 7 per cent GDP growth. The fiscal correction needed to get to the 4.5 per cent FY26 target is much less and will be a smaller drag on future growth.
 

Looking at the Budget arithmetic for FY25 over the actuals for FY24, the numbers look credible as has been the case the past few years. Revenue receipts are budgeted to be up by 14.68 per cent, driven by a 36 per cent rise in non-tax revenues (RBI dividend). Net tax revenues are budgeted to be up only 11 per cent, very conservative in my view, given that nominal GDP is targeted to grow at 10.5 per cent. Revenue expenditure ex interest payments is growing at only 4.78 per cent, with capex poised for another 17 per cent increase — again improving the composition of expenditure. The revenue deficit is down Rs 1.85 trillion (2.6 per cent to 1.8 per cent of GDP) and the fiscal deficit is down in absolute terms by Rs 40,358 crore.
 

Subsidies are poised to drop by Rs 32,000 crore in FY25, with significant increases in outlays for education by 15 per cent and health by 13 per cent. Rural development has also seen an increase in outlay of 11 per cent to Rs 2.65 trillion. There has been no increase in outlays for the rural job scheme under the Mahatma Gandhi Rural Employment Guarantee Act, the Jal Jeevan mission, or the PM Garib Kalyan Yojana. The only scheme that has a large increase is the PM Awas Yojana, which has gone up from Rs 54,000 crore to almost Rs 85,000 crore (56 per cent jump).
 

Strategic disinvestment seems to be more or less dead. There was no mention of selling public-sector banks or any other government companies. The disinvestment target remains at Rs 50,000 crore, a level similar to that of previous years. There seems to be no attempt to use the elevated valuations of public-sector stocks to accelerate monetisation.
 

In the coming year, market borrowing will drop by Rs 14,500 crore in absolute terms for G-Secs and by Rs 31,000 crore for small savings. The debt receipts number will drop by even more because cash is drawn down. Rates should remain benign.

From a market perspective the increase in long-term capital gains for equities is disappointing. The entire revenue-raising exercise seems to have fallen on the equity markets as we are going to have higher long-term and short-term capital gains tax and also higher securities transaction tax. Beyond making India less attractive to global investors, who pay no tax anywhere else in the world, it also puts into play tax policy uncertainty. What will be the ultimate long-term capital gains tax rate? This may not matter today because India is delivering high returns, but will in the longer run as we have to compete for capital. Our vibrant capital markets are a competitive advantage, and we are going to raise only about Rs 30,000 crore from these tax hikes? Is it worth risking market sentiment for such a small raise?
 

The schemes to encourage employment make sense. Encouraging companies to hire fresh workers and provide internships is a good idea. Government subsiding part of the cost reduces friction in hiring. However, implementation is the issue. Similarly, skilling is a critical need and it is good to see the focus on this in the Budget.
 

The plan to encourage research in agriculture and launch new varieties of weather-resistant crops is also a critical need. The plan to encourage digitisation of land records and reform urban planning is very significant. It can be a game changer if implemented fully.
 

The focus on ease of business, energy transition and micro, small and medium enterprises is all sensible. As always implementation will have to be observed.
 

Thankfully angel tax is gone. The reduction in effective tax rates for the middle class through higher standard deduction and rationalisation of tax rates will release about Rs 30,000 crore for this section of society. It is much needed and will boost flagging consumption. We would have hoped to see meaningful direct tax reform instead of a committee, but at least there is a time limit given for the report. It is good to see the focus on productivity, the ultimate driver of sustained economic growth.

Net net this is a reasonable Budget. The finance minister has maintained fiscal discipline, and avoided the temptation to dole out freebies. Borrowing has been contained, some structural reform has been attempted, and measures to tackle unemployment and skilling have been put into motion. Nothing very exciting but nothing to derail the India story either.

The writer is with Amansa Capital