The budget presented on Tuesday is part of that forward-looking continuity. This continuity is anchored in conservative assumptions, given uncertainty (political flux, elevated asset prices and shipping disruptions). As finance minister Nirmala Sitharaman’s speech states, there are “significant” downside risks for growth and upside risks for inflation (though core inflation is under control).
A day earlier, the Economic Survey estimated real GDP growth of 6.5% to 7% in 2024-25, at least half a percentage point lower than what most would have projected. It is best to be cautious and assume the downside, rather than be excessively optimistic and presume the upside.
In a similar vein, the budget assumes nominal GDP growth of 10.5% (implying a low GDP deflator) and cautious disinvestment receipts (set at ₹78,000 crore with an emphasis on the monetization of assets). Therefore, if the budget promises a fiscal deficit of 4.9% as a proportion of GDP, it is believable.
So is 4.5% of GDP for 2025-26, the government’s pre-announced goal. In part, this is because support for Bihar and Andhra Pradesh is through multilateral development agencies and not through the budget.
The budget has traditionally been perceived through a tax lens, direct as well as indirect. It would have been unreasonable to expect it to bring about a change in indirect taxes (of the domestic variety), since that’s the purview of the Goods and Services Tax (GST) Council. To quote Sitharaman, “To multiply the benefits of GST, we will strive to further simplify and rationalize the tax structure and endeavour to expand it to the remaining sectors.”
Who can quarrel with that? There are issues with import duties too and many people have rightly argued that basic customs duties are too high and that they lead to inverted rates of protection, compounded by regional trade agreements (RTAs). Accepting the problem does not mean one can jump headlong into solving it.
A priori, it is not easy to determine what is a raw material, vis-à-vis an intermediate good. With a spaghetti bowl of RTAs, most favoured nation (MFN) rates vis-à-vis levels of special ones are also not that obvious.
Instead of ad hoc and arbitrary tinkering (there are some changes in the budget), the finance minister said, “I propose to undertake a comprehensive review of the rate structure over the next six months to rationalize and simplify it for ease of trade, removal of duty inversion and reduction of disputes.”
Given the complexities and a clear deadline of six months, one should not complain. A similar point can be made about direct taxes, the terminal goal being a simplified and exemption-less system.
The budget tells us that 58% of corporate taxes are from the simplified tax regime and more than two-thirds of personal income tax payers have opted for the new system. If the comprehensive review of the Income Tax Act is to be completed in six months, that can’t be grudged either.
Next generation reforms need to boost India’s productivity and that’s contingent on making factor markets (land, labour and capital) more efficient. The catch is that these are often on the state list or concurrent list. “Effective implementation of several of these reforms requires collaboration between the Centre and the states and building consensus, as development of the country lies in development of the states.”
Potentially, ULPIN (Bhu-Aadhaar), digitization of cadastral maps, surveys, land registries and their linking to farmers’ registries, with similar exercises in urban areas, can be transformative, and can unlock the potential of non-performing assets. But the proof of the pudding is in the eating.
These ideas have been floating around for a long time and the track record of states pushing for such reforms is not impressive. The budget doesn’t spell out how such changes can be incentivized. On labour reforms, for example, state-level performance on issuing orders under the four new codes has been desultory.
The Economic Survey highlighted what was already known. Despite higher economic growth, there has been a problem with employment and job creation. Accordingly, the budget has schemes on employment and skilling, as it also does for micro, small and medium enterprises (MSMEs). For both informal labour and MSMEs, the basic constraint remains one of establishing identity.
The budget mentions a nine-point agenda. Apart from what I have mentioned, there are ideas on agriculture, human resource development, manufacturing and services, energy security, infrastructure, innovation and research and development. This year, capital expenditure is projected at 3.4% of GDP.
A distinguishing feature of the Narendra Modi government’s approach has been fiscal consolidation and rectitude. Since covid, and even earlier, capital expenditure has been the key. The multiplier benefits of capital expenditure are higher than those of revenue expenditure and the multiplier benefits of revenue expenditure are higher than those of tax reductions.
This is not just basic public finance theory, but is also borne out by empirical studies for India. For purposes of the budget, revenue expenditure (even subsidies) is often taken as exogenous in the short run and is sticky downwards.
That the budget has not given up its fiscal consolidation objective (despite pressures to the contrary) and has reduced the fiscal deficit ratio to 4.9%, as opposed to 5.1% expected earlier, without sacrificing capital expenditure on infrastructure is the big picture story. That augurs well for forward-looking continuity.
