Union Budget 2024-25 : Twists and Turns | Atul Sarma

Backdrops: Global and internal

The Interim Budget was presented on February 1, 2024. The shelf life of the full budget for 2024-25 is barely six months. This budget has been presented in the backdrops of geo-political uncertainties and high policy rates in developed countries that affect the inflow of FDI at one level and global growth (3%) resilience and softening inflation at another.

On the domestic front, the Indian economy has recorded a high growth of 8.2% in 2023-24 even if the level of real GDP is just 18% higher than its level attained in the pre-pandemic year, 2019-20. It has witnessed fiscal stability and manageable current account deficit with a large foreign exchange reserve of $ 653 billion (June 21, 2024). Yet, the Indian economy is facing sluggish growth of private investment, private consumption and export, three important drivers of growth casting doubt on official growth numbers.

Impact of election results on budget

Recent election results that has placed a coalition government in power have two visible impacts. One, budget allocation has clearly favoured two critical coalition partners, TDP (Andhra) and JDU (Bihar) on whom depends the very survival of the government. The other, a couple of major public concerns such as massive youth unemployment and agriculture and rural distress have received attention in the budget.

As for the first, Andhra got the commitment to provide funds for development of Amaravati as the new capital and two industrial nodes, Kopparthy and Orvakal and for completion of the Polavaram irrigation project while Bihar got four express-ways a two-lane bridge over the Ganga, flood control structures, power plant, air-ports and medical colleges. In contrast, Assam which suffers from recurring devastating floods and erosion year after year, has got only a vague assurance of assistance.

In the earlier regime, the PM declared “minimum government, maximum governance’ implying that the government would vacate the spaces for the private sector to take lead in the economy. Accordingly, several big reforms which were initiated by the previous governments, such as restructuring indirect taxes (GST), Insolvency and Bankruptcy Code, digitalization and financial inclusion were implemented. The government also cleaned balance sheets of the Public sector banks. It gave a big push to building essential infrastructures such as highways, logistics, ports and airports. More important, corporate tax rate was drastically cut in 2019 costing the exchequer 1.45 lakh crore annually. It was expected to encourage fresh investment that would create jobs which in turn boost consumption and then growth. But much expected crowding-in of private investment following large public sector investment in the recent years has not happened. It is understandable. Without visible demand, Indian businesses were reluctant to create additional capacity and therefore used the corporate tax bonanza to improve their balance sheets. In short, the entire focus on the supply side in an economy characterized by huge demand deficiency has not yielded expected result.

Budget focus

Until the 2024 election, the government seemed to be in denial of several public concerns. While the budget has retained the capex spend at ₹11.1 lakh crore at 3.4% of GDP, nine priorities that it has spelled out indicates its recognition of some of the ground economic realities which the recent election has brought home. It is reflected in its specific focus on employment, skilling, MSMEs, and the middle class leaving aside its continued thrust on fiscal consolidation.

Fiscal Consolidation

In the pandemic year, 2020-21 the Centre’s fiscal deficit shot up to 9.2% of GDP. Since then fiscal consolidation has been a priority. It has been gradually brought down. The budget pegged it at 4.8%, as against 5.1% in the Interim Budget. Unprecedented level of dividend transfer of ₹2.11 lakh crore by the RBI accompanied by buoyant tax revenue made this feasible. This way of bringing down the fiscal deficit averts contraction effect. Revenue deficit is also reduced from 2.8% in 2023-24 (RE) to 1.8% in the current budget by compressing expenditure on general (by 27.1% from 2023-24 (RE) and technical education (by 21.2%).

Jobs and skilling

Rampant youth unemployment has got attention in the budget. Tepid consumption and export growth is intrinsically liked with employment. Recognizing this, the budget has announced a plan of 2 lakh crore to generate 4.1 crore jobs in six years through three employment linked incentive (ELI) schemes. In other words, 68 lakh jobs are proposed to be created annually through ELI schemes agaisst 78.5 lakh jobs needed to be generated as per the Economic Survey. Under these ELI schemes, all workers and enterprise are required to be part of EPFO. “The government has proposed to generate 16 million EPFP-enrolled jobs in the current year incurring a cost of ₹17500 per employee by the government and the rest by the private sector. Even with an average salary of ₹25000 per month (the schemes are for employees earning less than ₹1 lakh per month) the private sector will bear 94% of the new employee cost†(Himangshu, Indian Express, July 25). To what extent, private employers will be willing to bear this high cost or how many jobs will actually be created in the remaining six months remain open questions.

Additionally, an internship scheme has been announced in PPP mode to give 1 crore youths in 5 years an exposure to real-life business environment opportunities in 500 top companies. In an economy where 50% of the graduates are reported to be unemployable, a scheme to build capability through internship is a good idea. After internship period is over, they would need regular jobs, Quality employment will be available there only when industries invest to create new capacity.

Thrust on MSMES for employment

This highly significant sector for the Indian economy is yet to fully recover from three successive shocks: demonetization (2016), hurriedly introduced GST (2017) and COVID-19-related sudden lockdown. The budget has proposed a slew of schemes covering financing, regulatory changes and technology support to help MSMEs and manufacturing, particularly labour-intensive manufacturing to grow and compete globally. But these measures will not reach out to a large segment of the micro-enterprises accounting for 99.5% of MSMEs, most of which are own-account enterprise. To that extent, its employment consequences will be limited.

Agrarian and rural distress

About two-thirds of India’s population live in rural areas and 45.8% of its working population are engaged in agriculture in 2022-23. Way back in 2016 (Feb 28) the PM promised to double farmers’ income by 2022. One study found that it rose only by 15%. For small and marginal farmers’ who partly depends on wage income, and for farm and casual labour, real rural wage matters a lot. But real wage has contracted in 25 out of 27 months till February 2024 leading to agrarian rural distress.

‘Productivity and resilience in agriculture’ was accorded the top place among the nine priorities listed in the budget speech. Accordingly, budget proposals aimed at transforming agricultural research, boosting production of oil seeds (India being dependent on imports) and promoting natural farming. While these measures might augment productivity and resultant farmer’s income in the medium term, there is no evidence to show that the real rural wage would increase. The budget has provided 2.66 lakh crore for rural development including rural infrastructure but there is no provision to increase wage under MGNREGA which is the key support for rural sector.

Middle class

The middle class which covers a wide range of population earning annually from ₹5 lakh to ₹30 lakh is the other focus. Inflation has eroded their purchasing power and savings. A few budget proposals such as raising standard deduction and, increased deduction of family pension would benefit only the upper segment of the middle class. However, nothing specific is proposed to bring down the high food inflation (7.4%), which hurts the poor and the middle class most.

To wrap up, the current budget bears the impact of a coalition government at one level and reflects some major public concerns at another. In contrast to the last ten years’ consistent focus on the supply side of the economy, there has been a little shift towards the demand side. However, how much effective demand is generated will depend partly on the success of the measures for job creation and partly on the extent of redressal of the lopsided distribution of factor incomes favouring capital in the growth process. The other important issue relates to discretionary fiscal transfers favouring the two critical coalition partners. Such partisan behavior of the government will dent cooperative federalism.

(Author: Atul Sarma, Distinguished Professor, Council for Social Development, New Delhi)