A Fine Balance

THE FULL BUDGET FOR 2024-25 DOES not exist in a vacuum. It possesses an antecedent and a consequent. The antecedent is the Interim Budget. The Bharatiya Janata Party (BJP) did not do as well in the General Election as it expected to. Two hundred and forty does not mean one forgets the Interim Budget, to start from scratch. Instead, 240 or not, one builds on the Interim Budget and what it promised. In the con­sequent, there is an immediate medium term and a longer term. The im­mediate medium term is the next five years of Modi 3.0. Between 2024 and 2029, India will become the third-largest economy in the world using official exchange rates. (Using purchasing power parity—PPP— exchange rates, it has already crossed that threshold.) Between 2024 and 2029, an aggregate GDP size of $5 trillion will be reached. India, and the world, will also be close to 2030, the terminal year for the Sustainable Development Goals (SDGs). (All countries have deviated from SDG trajectories, but India less than most.) The Budget for 2024-25 is not a one-shot and one-day affair. It is not as if the Union government ceases to function on the other 365 days. Therefore, as the Budget is analysed and vivisected, like a butterfly pinned to the wall, the next five years bear mention. Yes, import duties need to be stream­lined and rationalised, with duty inversion addressed. However, tinkering ad hoc at the margins on July 23 is not the answer.

Union Finance Minister Nirmala Sitharaman has promised us a review will be done in the next six months. Direct taxes, for both personal and corpo­rate taxpayers, have two parallel channels now. The choice is optional. One channel has fewer (not zero) exemptions, the other represents business-as-usual. We have been told a little less than two-thirds of corporate payees and a little more than two-thirds of personal income taxpayers have opted for the simpler system. Simpler is not simplest, the goal with zero exemp­tions. Zero exemptions reduce compliance costs, curb tax avoidance (as opposed to outright tax evasion) and decrease litigation. That trajectory is in the future. For the moment, the finance minister has promised us the Income Tax Act will be reviewed in the next six months, to make it simpler and more transpar­ent. Promises with clear timelines are credible. On both these counts, the 2024-25 Budget leads up to future Budgets and Sitharaman, and the government, can be held to those promises. This leaves domestic indirect taxes and the Goods and Services Tax (GST). GST is still a work-in-progress, notwithstanding efficiency gains obtained. There need to be fewer rates and more items (petroleum and related prod­ucts, liquor, tobacco, real estate, and stamp du­ties). But that is for the GST Council to propose, before the Union government disposes of the recommendations.

So much for the immediate medium-term consequent. In the longer term, there is the goal of a developed country, an expression that can be quantified and precision imparted in multiple ways. An obvious one is per capita income (in US dollars for purposes of com­parison) and aggregate size of the economy (also in US dollars) in 2047. Per capita income is nothing but the average productivity of India’s citizens, at least that segment of the population that is part of the workforce. En­hancing productivity requires efficient factor markets—land, labour and capital. Land is completely in the State List of the Seventh Schedule. Therefore, the desirable laundry list mentioned in the Budget (ULPIN, cadastral surveys, digitisation of registries, mapping with farmers’ registries) are conditional on how states rise to the bait. These ideas are not new. So far, states have been less than forth­coming. The Budget papers over how states can be incentivised, understandably so. The carrot of a Centrally sponsored scheme has not provided the miracle wand, so far. Nevertheless, it is fair to say that efficient land markets, even if variably implemented across states, will provide a considerable fillip to the growth trajectory.

The Budget does not say much on efficient labour markets, not directly. (Labour is in the Concurrent List of the Seventh Schedule.) States have not been that eager to issue orders under the four Labour Codes and flexibilities implied under those Codes have been nulli­fied through Orders, or through rigid Shops and Establishments Acts (which govern services). Though the Budget does not pay much attention to labour laws, it details initiatives on employment and skill formation. The proposition that job growth is an issue, and that the employment elasticity of growth has declined over time, is a truism. A day before the Budget, the Economic Survey highlighted it, as it did the question of female participation in the workforce (which has increased). At best, government can provide an enabling framework for growth, employ­ment and skill formation, and not offer to supply jobs itself. The Budget has the equiva­lent of what, for want of a better expression, can be called ELI (employment-linked in­centive) scheme, with various components. But the crux of whatever is done, both for individuals in the labour market and micro, small and medium enterprises (MSMEs), is greater formalisation. Those transitions (farm to non-farm, foodgrains to commercialisation, subsistence to wage employment, rural to urban) occur over decades, with heterogeneity among states. At best, the Union government encourages, incentivises and does not get in the way. This leaves the matter of capital markets and, no doubt, clarifications by the finance ministry will leave everyone better informed about what is intended for capital gains taxation. (The scrapping of the irritant of the Angel Tax deserves special mention.)

WITH 240, INSTEAD of whatever number was expected, the consensus among those who prided themselves on being ex­pert commentators was that Bihar and Andhra Pradesh would hold the Budget numbers to ransom. Nothing of the sort has occurred. In­stead, barring infrastructure, the assistance to these two states is through multilateral development agencies. Commentary was also ubiquitous that there would be pandering to populism. Pre-Covid, and more so post- Covid, the Modi government has stuck to fiscal consolidation and the path of fiscal rectitude, with an emphasis on capital expenditure, which yields greater multiplier benefits than revenue expenditure, or reductions in taxes. Those propositions are evident to anyone conversant with public finance theory and Indian empirical numbers also bear out those hypotheses. Continu­ing with that trend, capital investments in 2024-25 are 3.4 per cent of GDP, not a number to be scoffed at, given that there is a deficit reduction commitment. The Interim Budget for 2024-25 projected a fiscal deficit-GDP ratio of 5.1 per cent. That figure of 5.1 per cent would have made the goal of 4.5 per cent in 2025-26 a trifle dif­ficult to achieve. However, the full Budget for 2024-25 has given us 4.9 per cent, making 4.5 per cent next year well within reach. In spite of the large figure of Reserve Bank of India (RBI) dividends, this is a remarkable feat. Since the nominal GDP growth rate is only projected at 10.5 per cent, and not something that is a pie in the sky, the achievement is commend­able and one should underline that, as finance minister, Sitharaman’s fiscal marksmanship and transparency in number-crunching are far superior to those of some of her predecessors, some of whom have turned voluble and vociferous critics. The Modi government has been a bit reticent about outright privatisation, opting for disinvestment and monetisation of public assets. The Budget proposes disinvestment receipts of `78,000 crore, not an outlandish number. On this count, too, the Budget numbers are believable. To return to an earlier point, Cassandras expected populist revenue expenditure and even tax reductions. Nothing of the sort has happened. (Standard deduction changes and slab adjustments are minor.)

Every Budget is a balancing act. It is a statement of numbers, of the Union government’s annual receipts and expenditure, recognising that most revenue expenditure (salaries, pensions, interest payments, even subsidies) is sticky downwards and exogenously determined in the short run. The balancing act is one of finding room for capital investments, without giving up the objective of fiscal consolidation. In addition, especially since 1991, all Budgets have been identified with setting out a reform template, articulating the government’s vision. Every reform template can be criticised on grounds of omission, since, like Oliver Twist, everyone wishes for more. But, on grounds of commission, there is little one can fault the finance minister with. She has ticked all the right boxes. She has made promises one can hold her to, come six months. Like every Budget, questions can be raised about implementa­tion, especially because states are involved. Will every state deliver? That is an unlikely and impossible scenario. But even if some states deliver and factor markets start to be reformed, India will on that 2047 trajectory. Af­ter all, depending on the year, more than 95 per cent of national income occurs in states. An all-India growth rate is an aggregate of what hap­pens to state-level GSDP (gross state domestic product). The Economic Survey projected real growth of 6.5 to 7 per cent in 2024-25 and 7 per cent thereafter. With downside risks and global uncertainty, betting on more is possible, but it is best to be conservative. Indeed, most observers, including those outside the gov­ernment, would probably say 7.5 per cent, not 7 per cent. A Budget is only one small cog in the wheel. It is not the sole instrument. With that yardstick, the full Budget for 2024-25 is a pragmatic balancing act that helps, and does not hinder, the trajectory.

Budget 2024Capital investmentsconsolidationGDP growthNirmala SitharamanOpenomics 2024