India First

IT WAS WIDELY EXPECTED THAT THE ELECTORAL setback suffered by the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) would influence the contours of the first Union Budget in the government’s record-matching third tenure. It did, but not in the manner that was anticipated.

Instead of turning on the populist tap—to match the fiscally destructive open-ended electoral offers by the political Opposition—ahead of another round of key state elections, the duo of Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman declined to stray from the path of fiscal prudence.

They essentially stuck to the prudent and bold pre-election Interim Budget strategy of sans populism. At that time, the widely held belief was that NDA would romp home comfortably, and BJP would improve on its 2019 tally of 303 seats. However, to do so for a second consecutive time, despite BJP’s seat count dropping steeply to 240, is not just courageous. It smacks of conviction in the strategy of fiscal prudence and desire to preserve the hard-earned macroeconomic stability.

At the same time, to address the biggest pain point of the electorate—jobs—NDA pulled out the stops and scaled an out-of-the-box solution which focused on the twin challenges of employment and employability. In short, the strategy, which makes India Inc a key stakeholder, seeks to create jobs and at the same time address the legacy challenge of skill-deficit.

In politics it is not what you do but what you are seen to be doing. And in this context NDA’s effort is not short on either ambition or effort. It is making a risky bet though. In hindsight, as in the case of the Interim Budget sans populism, the government could be accused of passing up on an opportunity to rewrite the electoral narrative with freebies—which would also pre-empt the Opposition’s electorally tempting khatakhat economics. Only time will tell.

India’s natural resource and mineral deficit is a significant challenge that requires a multifaceted approach. The government’s measures, as outlined in the 2024 budget, provide a robust framework to address this issue. By combining policy reforms, technological innovation, and international collaboration, India can work towards securing a sustainable future

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For now, NDA’s first post-poll Budget has chosen to prioritise India’s development, ahead of firming its politics. Accordingly, it has adhered to the path of fiscal consolidation without compromising spending in priority areas, especially capital expenditure and social welfare. At the same time it has set out a blueprint for job support and initiated rationalisation of direct taxes—with the promise of a complete overhaul in the next Budget due in about six months.

Salutations have not been long in coming, especially from foreign analysts. In its advisory, Goldman Sachs said, “The government ticked all crucial macro-prudential boxes. Revenue targets look broadly achievable and tax assumptions realistic. The budget promised a policy

framework for long-term economic development to set the scope for the next generation of factor market (land, labour, capital and technology) reforms in conjunction with state governments.”

Arguing in the same vein, Morgan Stanley said, “There are three big surprises. The first is the unique incentive scheme for job creation. Second is the simplification of the tax code, including unification of TDS rates and capital gains tax rates and rationalisation of import duties, removal of angel tax, and a promise for further simplification by the next Budget; and lastly, the lower-than-expected fiscal deficit. The lack of populist spending is in line with expectation, although the increase in capital gains tax for equities is against our expectation of no change.”

The Budget for 2024-25 marks many transitions. First, of course, it sig­nals a new phase in BJP’s coalition management, a rebalancing between the ‘wants’ of the national party and the ‘needs’ of its regional allies. Historically, coalition Budgets often feature higher social spending, especially subsidies. The effects of coalition politics are evident with the social-sector spending increasing to over 5 per cent though still lower than the 6.7 per cent that it was in 2013-14 when the coalition dharma was more dominant. But now, the focus is on digital initiatives (Digital India), financial inclusion (Jan Dhan Yojana), sanitation (Swachh Bharat Mission), and infrastructure development alongside traditional social programmes.

Second, looking at the structure of public expenditure, this Budget signals transitioning from addressing basic needs to fulfilling the broader consumption wants of the population. This shift is critical in a maturing economy where citizens’ aspirations extend beyond mere survival to improving their quality of life and economic prospects.

Seen this way, this year’s Union Budget is an essay in good economics and good politics by Sitharaman.

Addressing the Resources Deficit

WHILE THE FINANCE MINISTER HAS BEEN WIDELY COMPLIMENTED for reining in the fiscal deficit, the Budget has also tried to address, perhaps for the first time, the natural resources deficit in the Indian economy. In a market-led growth paradigm, natural resources—minerals, oil, gas and water—are the key revenue drivers for, and major constraints to, macroeconomic growth and its spread across the sub-national economies.

India’s natural resource and mineral deficit is a significant challenge that requires a multifaceted approach. The government’s measures, as outlined in the 2024 Budget, provide a robust framework to address this issue. By combining policy reforms, technological innovation, and international collaboration, India can work towards securing a sustainable future.

First, this Budget has taken several measures to address the critical mineral deficit and promote sustainable resource management. The Critical Mineral Mission is a good initiative to focus on domestic production, recycling, and overseas acquisition of critical minerals. The mission aims to develop technol­ogy, a skilled workforce, and an extended producer responsibility framework.

Along with sustainability, there is some advancement towards energy security. The allocation for the development of small nuclear reactors and research into new nuclear technologies is an initiative that will not only enhance our energy mix but also accelerate the transition to sustainable energy sources. All the energy corporates will benefit from these developments

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Second is a series of tax reductions in customs duties for critical miner­als to encourage imports and ease the supply chain. For instance, on anti­mony, lithium and beryllium, the custom duty has been reduced to zero. Finally, there is promotion of investment in offshore mining by planning to launch the auction of the first tranche of offshore blocks for mining, which is expected to enhance domestic mineral production.

The finance minister’s proactive ap­proach in addressing the natural resource and mineral deficit through policy measures, technological advancement, and internation­al cooperation is key to resolving structural constraints by bridging the resource gap and ensuring the long-term sustainability of India’s economic growth. By reducing import duties and promoting domestic production and recycling, India aims to mitigate its depen­dency on foreign minerals and build a more sustainable industrial base.

Along with sustainability, there is some advancement towards energy security. The allocation for the development of small nuclear reactors and research into new nuclear technologies is an initiative that will not only enhance our energy mix but also accelerate the transition to sustainable energy sources. All the energy corporates will benefit from these developments, driving innovation and sustainability in their operations and contrib­uting to the national energy transition goals.

Tax Rationalisation

WHILE THE FOCUS REMAINS ON POLICY initiatives, the Budget has also introduced targeted reforms in direct taxation to simplify and rationalise taxes, bring in more uniformi­ty, improve compliances and reduce litigation through providing certainty.

With the Goods and Services Tax (GST) Council becoming the body for making indirect tax changes, the finance minister has, in Budget 2024, focused on rationalisation rather than relief in the direct taxes. While the changes in tax proposals, like the increase in capital gains tax, for both short and long-term assets, have been seen more in the nature of simplification of the tax regime rather than anything else, there is more to these changes from the perspective of financial stability. The increase in the securities transaction tax (STT) rate on the future and option trade in securities is a proactive measure to safeguard the markets which are widely believed to be overheated, which in a situation of asset price inflation in both physical and financial assets could be a source of instability in the financial markets and can quickly result in macroeconomic instability.

The Budget has introduced targeted reforms in direct taxation to simplify and rationalise taxes, bring in more uniformity, improve compliances and reduce litigation through providing certainty. Wth the GST Council becoming the body for making indirect tax changes, the Finance Minister has focused on rationalisation rather than relief in the direct taxes. The emphasis is on rationalisation and not appeasement of the middle class

 

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On the personal tax front, Sitharaman has been nudging taxpayers to move to the new tax regime to simplify compliances and increase dispos­able income. Along with a revision of slab rates under the new regime, an increased standard deduction for salaried taxpayers from ₹50,000 to ₹75,000, and a raised ceiling for family pension deductions from ₹15,000 to ₹25,000 have been proposed. In order to align tax deductions for government and non-government employees, a deduction of up to 14 per cent of salary for pension scheme contributions (up from 10 per cent) is proposed, with corresponding amendments for deductions to non-government employers. Overall, the focus is on rationalisation and not on relief or appeasement of the middle class.

Recalibrating Growth Strategy

THE UNDERLYING MACROECONOMICS OF THIS BUDGET SIGNALS A shift to a consumption-led strategy. It is not that the investment strategy is being abandoned, just that there is a clear intent to boost consumption indi­rectly. The economy has been, of late, going through an under-consumption phase, with last year the gap between public expenditure and consumption peaking at ₹3 lakh crore—the highest in a decade, excluding the Covid-impacted years.

There is a multipronged strategy to structurally lift consumption. A large part of this has been the emphasis on and high incidence of transfer payments in the Budget. More importantly, these transfer payments are focused on the lower base of the pyramid where the marginal propensity to consume is close to one which is expected to boost private final consumption expenditure in the economy.

Unlike the earlier Budgets where the transfer payments were designed to improve the quality of life, with the labharthi model based on targeted social welfare spending, there is a nuanced shift. This year, these payments are linked to employment and more importantly to employability.

Khatakhat Rejected

IN MID-JUNE, A FEW WEEKS AFTER THE CONCLUSION OF THE GENERAL Election, Congress-ruled Telangana announced a ₹31,000 crore farm loan waiv­er—a key poll promise of the party ahead of winning a landslide in the Assembly election last year.

It was similar to the massive ₹60,000 crore farm loan waiver the Congress-led United Progressive Alliance (UPA) had announced in 2008, a year ahead of winning the General Election in 2009.

In both instances, the actions, no matter how well justified or electorally lucrative, created or create a moral hazard. Though they do not impact the banks which loaned the money—as the state government picks up the tab—it incentivises non-payment of dues. In turn, this undermines the credit culture in the country. Further, the exchequer will have to borrow more to make good the loan waivers.

Similar electoral freebies emerged as a key electoral calling card of Congress’ strategy in the just-concluded General Election. A standout guarantee, if people voted for them, was the annual payment of ₹1 lakh every year—₹8,500 every month—it promised to the oldest woman in every poor family. Thanks to the stump speeches of Rahul Gandhi, the party’s former president, this guarantee acquired a catchy moniker: Khatakhat.

The slogan seems to have caught the imagination of a segment of the electorate—going by the outcome, wherein Congress nearly doubled its tally to 99 seats, over and above the successes it harvested in the polls to the state Assemblies last year.

Many women gullibly bought into the electoral promise and turned up at the party’s offices across the country on June 5 to claim their first instalment of ₹8,500, only to be turned away.

There is a fine line between economic populism or khatakhat economics and social welfare. While the former is open-ended and designed to enable redistribution, the latter is targeted at a specific individual or cohort—like the poor, women, farmers, and so on—with the intent of improving access to basics and thereby enabling empowerment.

With NDA triangulating the beneficiary by using their Jan Dhan (bank account), Aadhaar and Mobile (JAM), the targeting has become more accurate— saving the exchequer a cumulative sum of ₹2.75 lakh crore.

There is a fine line between economic populism or khatakhat economics and social welfare. It was a pleasant surprise to see the Finance Minister walk the talk. And this time, despite the temptation to indulge in populism. Not just because of the June 4 verdict but also the fact that another round of key state elections is imminent

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To be sure, saying no to populism does not mean denying social welfare—a necessity in the exceptional circumstances created by the unprecedented back-to-back economic crises of the Covid-19 pandemic, the Russia-Ukraine conflict, and rampant global inflation forcing the US Federal Reserve to jack up interest rates.

The big question in everyone’s mind was whether BJP, which leads NDA, would, in the aftermath of the election results, throw out its existing playbook developed around fiscal prudence and engage in revenge populism.

In the Interim Budget, NDA was a picture of fiscal sagacity, passing up on the opportunity to offer electoral freebies—as it did in 2019 with the PM Kisan stipend for farmers. The president’s address to launch the first session of the 18th Lok Sabha, signalled that no rethink was under consideration.

The underlying macroeconomics signals a shift to a consumption-led strategy. It is not that the investment strategy is being abandoned, just that there is a clear intent to boost consumption indirectly. The economy has been, of late, going through an under-consumption phase, with last year the gap between public expenditure and consumption peaking at ₹3 lakh crore—the highest in a decade, excluding the Covid-impacted years

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Indeed, it was a pleasant surprise to see the finance minister walk the talk. And this time, despite the temptation to indulge in populism. Not just because of the June 4 verdict, but also the fact that another round of key state elections is immi­nent. This smacks of conviction in doing the right thing and eschewing populism.

To be sure, BJP is yet to adopt this script in state politics—ahead of winning a historic mandate in Odisha, the party announced the Subhadra Yojana promising every woman a cash voucher of ₹50,000. But the signal at the national level is unambiguous.

Learn and Earn

IF THERE WAS ONE ELECTORAL PAIN POINT THAT DOMINATED THE election campaign it was the issue of jobs. In fact, it was central to the Opposi­tion’s campaign. They even committed to an unemployment allowance to mitigate the economic pain.

Worse, if jobs were far and few, most in the workforce were unemployable. The skill deficit is staggering, forcing IT companies like Infosys, TCS and Wipro to invest in massive retooling of supposedly skilled engineering graduates it recruits every year. The Economic Survey, presented a day ahead of the Union Budget, says only a fraction of the country’s youth are formally skilled.

The Survey summed up the problem succinctly when it said, “Employment is the crucial link between growth and prosperity, and its quantity and quality determine the extent to which economic output translates into better quality of life for the population. To foster employment is to oil the engine of demand-led growth, kept running by a populace progressively less dependent on the Govern­ment for its dignified survival and sustenance. Generation of suitable employment opportunities, commensurate with the legitimate aspirations of India’s youth, is also necessary to reap the country’s once-in-a-lifetime demographic dividend.”

To be sure, this is a legacy challenge NDA inherited when it pulled off its audacious win in 2014. Barring the tenure of the first NDA government led by Atal Bihari Vajpayee, India has witnessed jobless growth in the last two decades. It is a vexing problem that has eluded a successful public policy response.

However, by providing for near-saturation coverage in basics like electricity, cooking gas, banking, and so on, NDA had unwittingly unleashed the latent aspirations among the electorate. The unprecedented back-to-back economic shocks, beginning with the pandemic, triggered economic devastation. This only made a bad situation worse for the people.

Worse, the improvement in basics has unleashed an unprecedented trading up. Unfortunately, this is far from equitable. Some gained, while others did not, or comparably less. With household incomes either facing a continuous squeeze or not growing sufficiently to match aspirations, keeping up with the Joneses became an uphill task.

Together, all of this amplified the disappointment among the electorate. But not enough to vote out the two-term incumbent NDA—which otherwise had an exemplary record in delivering tangible development. Instead, it was sufficient to vote it down, resulting in a loss of majority for BJP, creating coalition pressures.

The Budget acknowledged this harsh political message. It initiated rationalisation of direct taxes with the accent towards leaving more money in the hands of those in the lowest tax slabs and undertook an out-of-the-box solution to address the challenge of both employment and employability. Implicitly, NDA also admitted to the jobs problem, which its spin doctors otherwise have consistently denied.

According to Trinh Nguyen, an analyst with Natixis who closely maps India, the country’s labour force is about 568 million and is projected to grow to 684 million in 2030—implying that India needs to create 115 million jobs in the next six years.

Further, Nguyen observes that though formalisation of jobs has improved in the last four years, the level is still low in India. She estimates it at about 11.2 per cent—12.9 per cent for men and 7.4 per cent for women. And, as Nguyen points out, one collateral gain of this trend is the boost to financialisa­tion of savings in India.

The government has decided to scale employment linked incentives to address the long-term employability of the country’s youth. This resolves a key disequilibrium and supply-demand mismatch in the employment labour market. Skilling initiatives in collaboration with states and industry, upgrade of 1,000 industrial training institutes, providing skilling and education loans and internship at the top-500 corporates are important initiatives which make a directional difference

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This year’s Budget seeks to give a boost to formal employment creation in the economy through Employment Linked Incentives (ELIs). The strategy proposed by the finance minister takes up from an ongoing scheme, Seekho Kamao or learn and earn, initiated by the state government of Madhya Pradesh last year, and a similar one to the scheme implemented by the Union government since 2013-14 for skill development of minorities.

In the job-oriented skill training scheme, launched by Shivraj Singh Chouhan, then chief minister of Madhya Pradesh and inducted as Union agriculture minis­ter in NDA 3.0, youth between 18-29 years of age receive a stipend of ₹8,000-10,000 while learning on the job. After completion of training, they are eligible to be hired by the over 16,000 companies which have registered under the programme.

The Union government has decided to scale ELIs to address the long-term employability of the country’s youth. This resolves a key disequilibrium and supply-demand mismatch in the employment labour market. Skilling initiatives in collaboration with states and industry, upgrade of 1,000 Industrial Training Institutes (ITIs), providing skilling and education loans and internship at the Top-500 corporates are important initiatives which make a directional difference.

If the incentivising of corporates to hire is implemented well, some of the sticky skill set gaps that India Inc has faced for long will get bridged. The attempt to scale the strategy to incentivise corporates for first-time employment through the Employment Linked Incentive scheme by partially bearing the wage cost is an innovative nudge. The Budget has allocated almost ₹1.5 lakh crore specifically for improving employability through targeted skilling.

To be sure, the Budget has to address a steep ask. According to the Econom­ic Survey only 4.4 per cent of the youth in India have been formally skilled. Addressing this deficit is not going to be easy, unless India Inc joins the party in full measure.

Fiscal Leveraging

OVER THE LAST FEW YEARS, THE UNION BUDGET HAS BEEN TAKING baby steps in leveraging money rather than simply allocating resources or underwriting expenditures. In this Budget, Sitharaman has used this tact vis-à-vis states. There is whole lot of incentivise to state governments to leverage resources. It is noteworthy that the Union is happy to give a substitute a grant with a guarantee for states. While it may not have got unnoticed, the fact is that for the Amravati project in Andhra Pradesh, the Budget has not allocated the ₹15,000 crore but promised to arrange it. The underlying idea here is to leverage money. The Centre would, presumably provide the ‘equity’ and leverage that to raise funding for this and such projects from multilateral lending agencies. It is this significant shift in the financial engineering of the Budget that has ensured that the finance minister, even after accommodating BJP’s key allies in Andhra and Bihar, still managed to walk the path of fiscal rectitude at the national level.

It also comes at a time when the Union is focused on land and labour—both state subjects—as the next generation reforms. With Sitharaman announcing that the Union government will provide fiscal support to incentivise states to introduce land and labour reforms, the intent is to move beyond government-to-government transfers and move towards market federalism, be it through raising productivity in farms and factories, or facilitating credit flow and other agricultural services, or bridging inequality. These initiatives need to be not only noted by the Sixteenth Finance Commission but also taken forward to make the federal system more market-oriented. To align the interests of state governments with market development is an important issue for transitional economies like India. It is an accepted fact, for instance in the case of China, that the relation­ship between provincial governments’ fiscal incentives and provincial market development is strong. The seeds of this model have been sown in this Budget.

Digital India 2.0

FOR MORE THAN A DECADE, SINCE THE ROLLOUT OF AADHAAR, the unique 12-digit identity number, India has democratised access to services using the architecture of Digital Public Goods (DPGs). This has come to acquire a moniker, the India Stack. It operates like building blocks that can be mixed and managed to create public services.

Aadhaar paved the way for eKYC, because of which 430 million received a Jan Dhan bank account in the last 10 years—achieving something that could not be managed in the first 70 years since Independence. Linking to their Mobile and Aadhaar (JAM) triangulated a beneficiary, enabling targeting of social welfare spending through Direct Benefit Transfers (DBTs).

What the proliferation of the digital economy has done is create a massive digital highway which is populated with transactions undertaken by 1 billion indians. This is nothing but a valuable digital database that could be leveraged for public good. This year’s budget has nudged this process further by backing two projects soft-launched three years ago, the account aggregator framework and the agri stack

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Over 300 social welfare schemes of the Union government are under the ambit of DBT and have enabled a cumulative transfer of over ₹30 lakh crore to beneficiaries. In turn, this has nearly eliminated leakages—cumulatively saving the national exchequer ₹2.75 lakh crore.

DPGs also enabled UPI—India’s unique digital payment gateway that took digital transactions to the people. UPI transactions are averaging 10 billion a month. Significantly, more than three-quarters of these transactions were for sums of less than ₹500.

What this proliferation of the digital economy has done is to create a mas­sive digital highway—which is populated with transactions undertaken by one billion Indians. Indeed, this is nothing then but a valuable digital database that could be leveraged for public good.

We saw this in operation with the CoWin vaccine portal, wherein over two billion vaccines were rolled out using the principle of ‘One Nation, One Vaccine’. A similar innovation was the ‘One Nation, One Ration Card’, which makes it possible for a beneficiary to access subsidised foodgrains anywhere—delink­ing access from location is benefitting the migrant workers who otherwise were missing out.

This year’s Budget has nudged this process further by backing two projects soft-launched three years ago, the Account Aggregator framework and the Agri Stack. The former is designed to pivot lending away from being based on collaterals to being based on cash flows—addressing the peculiar credit needs of the small and medium sector. It is already up and running, though it is yet to attain critical mass. The finance minister’s backing may give it the desired nudge, especially in addressing the credit needs of the smallscale sector.

Similarly, the Agri Stack, already powering the PM Kisan programme paying out a monthly stipend to 110 million farmers, is a collaboration between the Union and state governments, which collates the data of farmers. Either a government agency or a private entity can build APIs that can be linked to this database to provide farmers:

– Finance and agricultural inputs
– Localised and tailored early warning systems for disasters, including pest attacks, droughts, floods, etc
– Simplify government scheme benefits lifecycle for farmers
– Enable private participation in delivery of farm services
– Improve targeting of government benefits.

In the final analysis, it is clear that NDA has bucked expectations that gained ground in the aftermath of the June 4 verdict for the General Election. Instead, it has signalled business-as-usual. The feisty Opposition seems surprised. However, the success of Nirmala Sitharaman’s bold bet will be determined by the ability to roll out key initiatives, such as job support.

About The Author

Haseeb Drabu

Haseeb Drabu is an economist and the former finance minister of Jammu and Kashmir

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Anil Padmanabhan

Anil Padmanabhan is a Delhi-based journalist who writes on the intersection of politics and economics in his weekly column ‘Capital Calculus’

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