How does the Union Budget impact stability?
This year’s budget shows no intention of departing from this approach even in the aftermath of depleted political capital after the elections.
If there is one thing the current government can rightly take credit for, it is India’s macroeconomic stability, even if this has come at the cost of political capital. The previous Modi government adopted a retrained fiscal approach to dealing with the pandemic’s shock to the economy and has not picked quarrel with its monetary policy arm – technically independent – for being hawkish in dealing with inflation in the economy. Both these things might have led to worsening of economic growth as well as sentiment in the short term.
This year’s budget shows no intention of departing from this approach even in the aftermath of depleted political capital after the elections. The projected fiscal deficit for 2024-25 is now pegged at 4.9%, 20 basis points lower than what this number was in the interim budget presented in February. One basis point is one hundredth of a percentage point. It also hopes to bring down the fiscal deficit to 4.5% by the next fiscal year. The budget also talks about a fiscal glide path which will keep the debt-GDP ratio under check. “From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the Central Government debt will be on a declining path as percentage of GDP,” the finance minister said in her speech. This will definitely bring relief to financial markets.
To be sure, the budget has retained policy space to respond to unforeseen global shocks which it acknowledges pose significant downside risks to growth. “With continued global uncertainty and potential new avenues of conflict still open, prudence demands that the Government retain fiscal flexibility to be able to effectively respond to the potential unforeseen challenges,” said the Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement of the Budget.
The budget’s focus on bringing down fiscal deficit and keeping the debt burden under check is also in keeping with the Economic Survey’s emphasis on the need for deepening the corporate bond market which will bring an additional source of investment finance over and above banks. “An efficient corporate bond market with lower costs and quicker issuing time can offer an efficient and cost-effective source of longer-term funds for corporates,” the Survey said. The government’s refusal to make specific concessions to global bond indices and stay focused on attracting them with overall fiscal prudence is definitely a better approach.
To be sure, the budget also takes a more broad-based approach to macroeconomic stability rather than just managing the fisc. Here are two important areas where this approach is clearly visible.
One of the biggest reasons for benchmark inflation staying above RBI’s target of 4% in the recent past has been food inflation. The budget takes what will be a more reassuring path to managing food inflation rather than the provocative tone adopted in the Economic Survey. While the latter talked about shifting to an inflation targeting framework which excludes food inflation, the budget strikes a more conciliatory note underlining the importance of developing climate resilient crop varieties and achieving self-sufficiency in key crops such as pulses and oilseeds to mitigate the volatility from international food markets. The budget also reiterates the government’s commitment to supply side interventions in food markets to keep food prices under control.
The other, not so explicit, push in the budget towards macroeconomic stability is a subtle effort to discourage speculative and myopic investments in the financial markets. It has raised both short- and long-term capital gains tax on financial assets, in response to the Economic Survey’s concern on potential exuberance in the equity markets and its destabilising impact on the economy. “It is essential to strike a note of caution. The market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication. Financial assets are claims on real goods and services. If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience,” the Economic Survey said. In taking this approach, the budget has taken a very different route from the political rhetoric of the BJP’s top leadership which was talking up the stock markets during the 2024 election campaign.
By continuing to prioritise macroeconomic stability, the budget is hoping to achieve two key objectives. One, it is strengthening India’s insurance against volatilities in global and domestic financial markets and two, it is also signalling to the world that the losses in 2024 elections have not eroded the confidence of the BJP about being in power for a long time and eying political gains from structural changes in the economy rather than making cyclical or short-term bets. This is the cornerstone of the BJP’s macroeconomic approach.