The Prologue to July

CALL IT THE COMEBACK BUDGET. FROM THE STATEMENTS OF Prime Minister Narendra Modi and Union Finance Minister Nirmala Sitharaman, it is clear that the Modi government expects to be back in the saddle after the General Election a few months down the line. The nature of the announcements in the vote-on-account and the de­tails of the interim Budget clearly point to the political confidence of the Modi government.

On February 1, just before the start of the Budget session, Modi confi­dently asserted, “As you all know, when polls are this close, the government presents an interim Budget, and we too shall be following that tradition, and we will bring a full Budget once the new government is formed.”

The same confidence was on display in the Lok Sabha in Sitharaman’s speech wherein she blended the achievements of the Modi government in the last one decade even as she spoke about outlining an economic strategy for Amrit Kaal till 1947. The forward looking nature of the pronouncements and the confident re-telling of the government’s achievements highlighted its political confidence.

At the same time, Sitharaman was unsparing in her attack on the economic mismanagement of the previous government. Towards the end of her speech, she said, “In 2014 when our government assumed the reins, the responsibility to mend the economy step by step and to put the governance systems in order was enormous. The need of the hour was to give hope to the people, to attract invest­ments, and to build support for the much-needed reforms. The government did that successfully following our strong belief in ‘nation-first’.”

She went on to add, “The crisis of those years has been overcome, and the economy has been put firmly on a high sustainable growth path with all-round development. It is now appropriate to look at where we were then till 2014 and where we are now, only for the purpose of drawing lessons from the mismanagement of those years.” In this context, Sitharaman said the government would lay a White Paper on the table of the House.

The confidence with which the finance minister made her assertions and the trademark mix of welfare schemes and forward-looking investments of the Modi government show the government is confident of returning to power soon. There was not a trace of diffidence or hint of hesitation that usually marks such interim exercises. The only place where Sitharaman said she was not going to make any changes was in the structure of direct taxes. That, she said, was part of the convention in such exercises.

Sitharaman said the government was planning to construct two crore more houses under the PM Awas Yojana in the next five years to meet the increased demand for housing. This is over and above the target of two crore houses set under the PM Awas Yojana that is about to be completed. She said the government would also launch a scheme to help deserving sections of the middle class living in rented houses, or slums, or chawls and unauthorised colonies buy or build their own houses.

Another announcement was about ‘lakhpati didis’ or women who have achieved economic success through self-help groups (SHGs). Given the success of the programme—there are already one crore lakhpati didis—it has been decided to increase the target for this programme from two crore to three crore.

If these, and more, such programmes are geared towards eco­nomically empowering the underprivileged, then the 2024-25 Budget has its set of forward-looking investments as well. One example is the planned ₹1 lakh crore fund that will provide 50- year interest-free loans. The aim is to spur private sector research and development in ‘sunrise’ domains. The finance minister also spoke about launching a new fund for “deep tech” technologies for defence research and for expediting atmanirbharta (self-reliance).

The government has continued to bet big on infrastructure as a source of econom­ic growth and this Budget was no different. This time, the government has announced an 11.1 per cent increase in the outlay for infrastructure with the sum amounting to ₹11.11 lakh crore. This amounts to a commit­ment of 3.4 per cent of GDP for this purpose. This is in line with the steady increase in public sector capital expenditures (see chart).

Among the taxation proposals, Sithara­man proposed a continuity of measures for some startups, pension funds and sovereign wealth funds that were expiring on March 31, 2024. These have been extended by a year. She also offered relief to a large num­ber—approximately one crore—of taxpay­ers subject to “petty disputes” on the part of the Income Tax Department and have had longstanding demands pending on them. In many cases—with some going back even to 1962—these demands vary from ₹10,000 to ₹25,000. The finance minister proposed doing away with some of these demands (up to ₹25,000) for the period up to financial year 2009-10 and ₹10,000 for financial years 2010-11 to 2014-15.

WHAT IS THE economics that under­lies this political confidence?

The 2024-25 Budget shows several inter­esting features in this respect. Given that the General Election is just a few months away, the increase in total expenditure for 2024-25 is just 6.1 per cent. The 2019-20 in­terim Budget had a 13 per cent increase in expenditure under similar circumstances. The 6.1 per cent, when viewed against the average inflation rate in 2023—5.66 per cent (CPI)—shows virtually no increase. This bespeaks the Modi government’s political confidence that it does not need to incur any extra expenditure for political reasons in an election year. The breakdown of total expenditure tells its own tale: expenditure on revenue account for 2024-25 is estimated to go up by only 3.23 per cent when compared to the Revised Esti­mates (RE) for 2023-24. This is lower than the prevailing rate of inflation. In contrast, expenditure on capital account is estimat­ed to go up by 16.92 per cent when compared with RE for 2023-24. In an election year, it is normal to see capital expenditures being compressed. This, again, is a marker of the Modi government’s confidence about electoral outcomes.

But beyond elections and politics, these expenditures reflect something more fundamental to this government: even as it pursues welfare measures, it is quietly ramping up investment expenditures. This is a sign of a government that realises the ne­cessity of building India’s physical infrastructure that is essential for robust economic growth.

The promise of eschewing populism also has a sound eco­nomic logic. Back in 2021, the finance minister had promised to take the economy back on the path of fiscal consolidation. There were good reasons to do so. For one, 2020-21 was an extraordinary year for the Indian economy. Covid-19 imparted a massive shock to the economy even as the government had to undertake ex­tensive borrowing in the face of severe economic problems due to the pandemic. At some point, those debts and deficits had to begin paring down. For anoth­er, macroeconomic stability requires that fiscal deficits and debts be kept under check. Else, fiscal and monetary coordina­tion becomes difficult and in a country like India with in-built inflationary pressures that is a difficult task even in the best of times. But for the Modi government, there was another imper­ative, given its spending priorities: in 2023-24 as well as 2024-25, interest payments as a percentage of revenue receipts remain elevated. In 2023-24, this figure was 39.09 per cent while in 2024- 25, it will rise marginally to 39.66 per cent. When measured against tax revenue, these figures are even higher. In effect, unless these payments go down, the government’s room for spending, especially spending on capital expenditure, will be less than what it desires. That is another reason why the finance minister is keen on fiscal consolidation.

So it is not surprising that the fiscal deficit for 2023-24 (RE) was marginally less than what had been originally budgeted— 5.8 per cent versus 5.9 per cent. But what is more interesting is that Sitharaman has promised to bring this down to 5.1 per cent in 2024-25 and pare it down to 4.5 per cent by 2025-26. The fact that this consolidation is being carried out in an election year makes it even more remarkable. The sources of consolidation are both from the revenue and expenditure sides. In 2024-25, revenue receipts are expected to increase by 11.17 per cent over 2023-24 (RE) even as for the financial year ending in March 2024, this figure will rise marginally by 2.56 per cent when compared with the Budget estimates. Simi­larly, borrowings in 2024-25 are expected to be marginally lower by 3.58 per cent compared to 2023-24. The modest increase in the budgeted expenditure for 2024-25 adds to this fiscal consolidation drive.

The schemes and programmes outlined by the finance minister in her speech clearly indicated the pro-poor and pro-welfare orientation of the Modi government. But there is a deeper economic basis for that outlook as well. India’s public finances were cramped for a long time due to a low tax base, tax avoidance and evasion. This, in turn, led to an excessive reliance on indirect taxes for revenue, a regressive practice as indirect tax­es are borne equally by everyone, rich and poor alike. This was largely true for the past three-to-four decades and even some years of the Modi government. But in recent years (see chart), the com­position of tax revenues has changed. In 2023-24, for example, indirect taxes accounted for 27 per cent of revenue receipts while direct taxes stood at 33 per cent. In 2024-25, the share of indirect taxes will remain the same as 2023-24 at 27 per cent, even as the quantum of direct taxes rises by three percentage points to 36 per cent. The effect is not just due to an increase in the base of income taxpayers but has distributive consequences as well: as the pro­portion of indirect taxes goes down, the system becomes fairer towards the poor. There is no doubt that much distance has to be traversed on that road but the composition of taxes shows that a shift has been made. This should be seen in perspective: every year after the Budget, there is routine breast-beating about how the rich are being favoured by the reduction of corporation taxes or by tax breaks. Until recently, the favourite fact of the section that would routinely dub the government ‘neoliberal’ would point to the revenue foregone statement. The reality is captured much better by the inter se distribution of direct and indirect taxes. That tells a very different story.

Another way to view expenditures is through the prism of ‘core of core’ versus ‘core’ schemes provided in the Budget at a Glance. The former can, roughly, be considered populist while the latter are in the nature of building key infrastructure and services for poor and underprivileged groups. A detailed look at this section shows that schemes that build infrastructure and deliver essen­tial services to the poor have much higher outlays overall when compared with the populist ones. Here again, the emphasis and direction of change are towards empowering the poor instead of merely dishing out handouts to them, something emphasised by the finance minister in her speech.

An interim Budget, by its very nature, is bound to be a limited exercise in fiscal management. But even from that perspective, the finance minister packed a punch in her short statement. Apart from a summation of a decade’s work by the Modi gov­ernment, the statement outlined the continuing and new pri­orities of the government. The political economy thrust of the vote-on-account was very clear and reflected the larger political realities of the country. On the one hand are a large number of people who have just exited poverty and need help to stand on their feet. On the other are the imperatives for growth to ensure that enough resources are available to the government to do what is required to help the poor and those “just out of poverty”. This is apart from the strategic imperatives for sustaining high growth for a sufficiently long period so that the country can meet exter­nal challenges as well. Budgets are first and foremost political statements even if they are accounting exercises. One can choose to look at them through the lens one chooses to wear. But one thing is clear: over the past decade, the Modi government has been able to square the circle of meeting welfare demands and finding enough resources to invest in growth. The fact that during these years private sector investment was sclerotic meant that the work of heavy-lifting would fall on the government’s shoulders. The going has not been easy. At times external shocks like war and pandemic have muddled the government’s path but the steady growth of the economy in the face of global headwinds shows that India is going in the right direction. The vote-on-account is another pointer to that. The real meat will come in July.

Budget 2024infrastructure developmentInterim BudgetNarendra ModiUnion Finance Minister Nirmala Sitharamanwelfare measures