Union Budget 2024: FM sticks to the plan

Budget taxed and spent smartly, more clarity needed on fiscal path

Union Finance Minister Nirmala Sitharaman, in presenting the Union Budget for 2024-25 in Parliament on Tuesday, chose not to emphasise the political context within which her ministry had to work. The government of Prime Minister Narendra Modi, which now has a third term, has more constraints than it had previously. The reproof it received from some of its core voters meant it had to take employment and inequality seriously. And its new dependence on state-based parties, particularly the Janata Dal (United) of Bihar and the Telugu Desam Party of Andhra Pradesh, meant it was susceptible to demands for handouts from those two states in particular.
 

Ms Sitharaman and her staff have done a creditable job of balancing these political constraints and the larger commitment, visible throughout Mr Modi’s prime ministership of 10 years, to fiscal responsibility. A large part of the Budget speech was dedicated to a long list of projects and proposals targeted at Bihar and Andhra Pradesh. But there was no major dent in the fiscal consolidation path that Ms Sitharaman outlined as long ago as the 2021 Budget. In the vote-on-account earlier this year, the targeted fiscal deficit for 2024-25 was 5.1 of gross domestic product (GDP). Instead of revising this target upward, as could easily have been the case, given greater politics-related demands on the purse, the minister instead set a tighter target of 4.9 per cent of GDP. Further, she promised by next year the fiscal deficit would be below 4.5 per cent of GDP. The Budget has been able to overperform on fiscal rectitude, partly thanks to the largesse of the Reserve Bank of India, which gave the government Rs 2.1 trillion as dividend for 2023-24. This was more than twice what had been accounted for by Ms Sitharaman in February, and should be compared to less than Rs 0.9 trillion handed out in 2022-23.
 

This remarkable commitment to fiscal restraint does not come at the cost of poorer quality spending. The government’s commitment to capital expenditure remains intact: Revenue expenditure has increased at a lower rate than total expenditure. Interestingly, some of this increase in capital expenditure will be allocated to the states. But it will be made conditional on the state governments conducting some growth-enhancing reforms. While this might further stress the already tense relations between the Union government and the states, there are limited levers available to New Delhi in pushing reform and it should not be surprising that officials will try all of them. This government has been very careful to not spend money where a sovereign guarantee would suffice, and using fiscal incentives to bring state governments into line.
 

Such astute management is visible also in the top line numbers for subsidies: A crackdown on procurement, for example, has brought down the food subsidy bill even as the government maintains its free foodgrain allowances. The subsidy bill, once the biggest problem for fiscal mathematics in India, has been steadily declining as a percentage of GDP.
 

The other political constraint — dealing with the job deficit— was not handled with quite so much care. The “internship” scheme announced in the Budget, for example, seems poorly thought out. If implemented as outlined, it would inevitably lead to an intolerable intrusion into the human resources policies and processes of the private sector, and open up pathways for patronage and inefficiency. This may need to be re-examined.
 

The markets did not react positively to a Budget that should have impressed with its sobriety. This was, however, not a response to macroeconomic questions as such, but a narrow view of the tax proposals in the Budget. Ms Sitharaman showed considerable courage in addressing what is called the imbalance between labour and capital income in this country. She chose to raise the tax on long-term capital gains to 12.5 per cent from the previous 10 per cent and on short-term capital gains to 20 per cent from 15 per cent. Meanwhile, tax rates on futures and options transactions were sharply increased and changes were announced to how income from share buybacks would be treated. This might have turned the markets pessimistic temporarily. But the fundamental reasons for such changes are sound.
 

Given the exuberance in the markets of late, it was also the right time to introduce such tax increases. Investors concerned about the attractiveness of equities should have paused to consider the effects on saver behaviour of the simultaneous removal of indexation benefits for savings in real estate or gold. This might hurt the real estate sector, but it would make long-term investment in equities more attractive to those who, at the margin, prefer gold or housing as stores of value.
 

One forward-looking trend in the Budget that should be watched is a partial reversal of the protectionism that has crept into India’s trade policy. Customs duties were reduced on about 50 items. Ms Sitharaman also promised a calibrated rationalisation of Customs duties. Low and stable tariffs are a prerequisite for India to enter global supply chains.
 

However, these are just hints of a larger Customs policy. Some of the negative reaction to the tax changes is also because it is not clear what the future path of direct taxes is. And while a promise has been made on the fiscal deficit next year, the steady-state target for the deficit and debt is still unknown. More clarity on this front would have helped all stakeholders.