How does the Union Budget impact growth?
The budget has continued with its focus on capital expenditure which can boost the economy’s long-term prospects
The Economic Survey projecting a more conservative estimate of GDP growth (6.5%-7%) for 2024-25 than even the Reserve Bank of India’s projection of 7.2% should have told us that the Union Budget 2024-25 was unlikely to throw the (fiscal) kitchen sink at the economy. In fact, the entire focus of the budget is on boosting India’s medium-term to long-term growth prospects rather than short-term quick fixes.
That’s partly a reflection of the fact that quick fixes are not required: India already has an edge in terms of growth rate vis-à-vis major global economies and has managed this without a crisis on the inflation front. The budget also suggests that taking India beyond its potential growth rate in a sustainable manner would require more than a one-time fiscal boost to the economy. Here are some elements from the budget which talk about these challenges.
The budget has continued with its focus on capital expenditure which can boost the economy’s long-term prospects and also plug supply-side gaps in infrastructure. Capital expenditure allocation has been kept unchanged (from the interim budget) at ₹11.1 lakh crore which is 3.4% of GDP. The effective capital spending figure is for 2024-25, including interest free loans provided to states, is expected to be ₹15 lakh crore. While the approach is laudable in principle, it remains to be seen whether it will be able to address the challenge of weak consumption demand, especially at the bottom of the pyramid which is crucial to a sustained revival of private investment activity in the economy.
To be sure, the budget does have a theoretical road map for boosting incomes in the not-so-rich parts of the Indian economy. For example, it talks about encouraging farmer cooperatives and supply hubs to boost incomes in the agriculture sector. There is also talk about formulating a new National Cooperation Policy. Similarly, there is talk of formulating a Purvodaya (Rise of the East) plan which will focus on reviving the economic fortunes of Bihar, Jharkhand, West Bengal, Odisha and Andhra Pradesh, which are largely poor and resource-starved states and can potentially generate huge tailwinds for overall growth.
What does the budget do for India’s manufacturing sector? A slew of changes has been announced in customs duty rates, which, the budget has claimed will create the right incentives for domestic manufacturing. How far they go in correcting what industry terms an inverted duty structure for Indian manufacturing will become clear once the fine print is analysed.
There is also a talk about easing capital constrains for MSMEs on many fronts. This includes a credit guarantee of up to ₹100 crore for MSMEs, government subsidies on creation of new jobs in the formal sector at salaries up to ₹1 lakh per month, and revisiting the credit assessment framework for MSMEs. The upgradation of 1,000 new Industrial Training Institutes (ITIs) in a hub-and-spoke network of such centres could be a potential game-changer for easing the supply constraint of skilled labour for India’s manufacturing sector. This budget complements this initiative by talking about providing skilling loans up to ₹7.5 lakh for 25,000 students every year.
The budget also talks about easing voluntary closure of Limited Liability Partnerships, which could give a nudge to capital rich entrepreneurs to invest money in creating new firms. On the other extreme, it has raised the upper limit for Mudra loans from ₹10 lakh to ₹20 lakh for borrowers who have availed and repaid previous loans. Can these policies catalyse entrepreneurship at the rich and poor ends of the spectrum? The budget is hoping that it will.
As is evident from the discussion above, the budget’s approach to boosting India’s growth is more about micromanagement of gaps in various sectors of the economy rather than a big bang boost from some major policy announcement. This kind of an approach might work to maintain a growth rate in the ballpark of 7% which is what the Economic Survey has envisaged as being in the realm of the possible. “In the medium term, the Indian economy can grow at a rate of 7% plus on a sustained basis if we can build on the structural reforms undertaken over the last decade”, it says in the chapter on India’s medium term growth prospects.
However, whether this will generate the required ballast to take care of India’s rapidly closing demographic dividend window – India’s working age population will peak in the 2040s – is a more difficult question to answer. But then, as the survey points out , the global economic environment has changed for worse at a time when India is making its bid to become an economic superpower. The budget began by reiterating the fact. “Elevated asset prices, political uncertainties and shipping disruptions continue to pose significant downside risks for growth and upside risks to inflation”, finance minister Nirmala Sitharaman said.