Fiscal consolidation, with a reform vision
Budget 2024 balances the need to spur economic growth with the need to signal commitment to fiscal prudence
Some budgets are more about the nuances of the government accounts, and some bring in an additional layer of policy intent to magnify the effect. The first budget of the National Democratic Alliance (NDA) government in its third term falls in the latter category. It not only addressed immediate economic priorities but also laid down a futuristic policy road map for the next five years. There are three threads running through the budget statement — continuation of the earlier policy framework of macro-stability and supply-side interventions, a demand-side nudge towards youth, rural population, and the middle class, and an outline of the next generation of reforms to be ushered in. The harmonisation of these three imparts a holistic perspective to the budget proposals.
Another way to look at the budget would be the six key areas where it focuses on — agriculture and rural development to nudge rural demand and contain food price volatility; employment generation, particularly in the formal sector with well-designed schemes; manufacturing with an emphasis on labour-intensive, export-oriented MSMEs; infrastructure, energy and urban development as a continuation of earlier trends; bottom-up next generation reforms to improve the productivity of factors, in collaboration with state governments; and adherence to macro-stability by committing to fiscal prudence.
If we delve deeper into these areas, we find that the allocation for agriculture and rural development has been increased to ₹4.13 lakh crore in FY25 from ₹3.79 lakh crore in FY24 (up 9% year-on-year). However, the budget refrains from higher cash handouts in rural areas and emphasises improving the productivity and climate resilience of agriculture. The objective is to both support sustainable rural growth and contain food inflation.
The budget allocates ₹2 lakh crore (~0.6% of GDP) to be spent on multiple new schemes of employment creation and skill development to help 41 million youth and foster further formalisation of the labour market. This is a very comprehensive package, involving the active role of the private sector and will run for multiple years to supplement other job creation avenues through supporting MSMEs and different kinds of self-employment. For FY25, the budget allocates ₹10,000 crore for the three new employment-linked incentive schemes.
Following the suggestions in the Economic Survey, the primary manufacturing push is towards fostering MSMEs, particularly the labour-intensive ones, as they will buttress the employment creation goal. Improving credit access, easing working capital stress, and reducing the regulatory burden are expected to improve the investment in the purchase of machinery and equipment by MSMEs and steer the next capex cycle. The plan to set up 100 investment-ready “plug and play” industrial parks would further aid in that direction. In fact, the many proposals to nudge demand would also be an indirect boost to manufacturing.
Although the total capital expenditure, at ₹11.1 lakh crore (3.4% of GDP), remains unchanged from the interim budget, it represents a more than 15% y-o-y growth on top of the average annual growth of ~30% in the last four years. The sectoral dimension of the infra push might be diversifying a little with a renewed focus on urban development, water, including irrigation and flood management, housing, and energy, rather than the traditional drivers of roads and railways. Energy transition is going to be a priority area for the government, and infrastructure development in the eastern part of the country could get a much-needed fillip.
Over the first two terms, the government implemented several supply-side structural reforms, which helped the economy rebound strongly from the pandemic shock. In the budget, the government has stated that it will formulate an Economic Policy Framework to usher in the next generation of reforms to sustain this growth path. There is a plan to review all the frameworks of direct taxes, customs duty, and Goods and Services Tax to simplify and rationalise them to meet India’s growth aspirations. The budget has also promised to bring out a financial sector vision and strategy document to set the agenda for the next five years. Improving the productivity of factors (land, labour, capital, and entrepreneurship) and the efficiency of markets would be the purpose of these reforms, which will be undertaken in collaboration with state governments. The reforms are likely to have a bottom-up approach to reduce the regulatory bottlenecks and exploit the digital and technological prowess developed by India. New growth avenues are expected to open up from these reforms.
Despite the financing need for all these focus areas mentioned above, the government reduced the fiscal deficit target for FY25 to 4.9% of the GDP from 5.1% in the interim budget. Higher dividends from the Reserve Bank of India provided the government additional fiscal space of ~0.4% of GDP compared to the interim budget. The government has judiciously divided this space into almost equal halves between reducing the deficit and embarking on some extra spending. Its commitment to bring down the deficit to 4.5% next year and then long-term guidance to follow a fiscal deficit trajectory, which will keep the Union government’s debt (as a percentage of GDP) on a declining path, will be a welcome signal for investors and rating agencies.
A credible and conservative budget math has been the hallmark of this government, and the FY25 Budget is no exception. The modest nominal GDP growth projections at 10.5% leave scope for an upside surprise, and even the tax buoyancy estimate of around one is lower than the average of the last three years. On the other hand, the improvement in the quality of expenditure is quite prominent as capital expenditure has moved up from 2.1% of GDP in FY21 to 3.4% of GDP now, while the revenue expenditure has been brought down from 15.5% to 11.4% over this period. The internals of deficit financing seem to suggest that the government has been conservative on its market borrowing estimate, too. The announced fiscal path could trigger positive rating action or commentary and create the right pre-conditions at a time when India is embarking on its journey of inclusion in global bond indices.
Samiran Chakraborty is managing director and chief economist, India, Citigroup.The views expressed are personal