Growth@work: The big message from Union budget 2024-25 (2024)

The continuity comes from the fact that the government remains on the path of fiscal consolidation that it has set for itself. The pivot can be implicitly read in the slew of measures that seek to boost labour incomes in an economy that is gasping for more household spending on consumer goods.

Budget 2024 is based on a credible set of numbers. The assumption that the underlying economy will grow by 10.5% this fiscal year is believable. So is the modest tax buoyancy of 1.05, which means that the government expects its net tax collections to grow in tandem with the economy rather than outpace it. Such a conservative approach has been a feature of Indian budgets in recent years, and a welcome break from some of the rather dodgy accounting in many earlier budgets.

However, the numbers in the new budget deserve close scrutiny. The revenues of the Union government have been bolstered this year by the exceptional dividend given by the Reserve Bank of India (RBI) in May. The government had assumed in the interim budget presented in February that the central bank would pay it ₹0.8 trillion, which was close to the amount received in the previous year as well. The actual dividend paid to the government in May was ₹2.11 trillion. The extra ₹1.31 trillion that has come into the government kitty is a one-time bonanza that is unlikely to be repeated every year, and such windfalls should ideally be saved rather than used to fund recurring payments.

Tax revenues

The exceptional RBI dividend plus an extra ₹2.57 trillion of net tax collected from an expanding economy helped increase Union government revenues by ₹4.03 trillion over the previous year. The increase in revenue has been used to bring down the fiscal deficit even below the level estimated in February, as well as to support higher nominal spending.

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That the fiscal deficit target for the ongoing year is now 0.2 percentage points lower than what was announced before the elections indicates that a new era of coalition politics will not send the government off its chosen fiscal road, despite the need to selectively shower money on states where key allies have a political base. However, India still needs to remain disciplined on the fiscal front. At 1.4% of GDP, the primary deficit, which does not include interest payments, and is a good indicator of the sustainability of public debt over the medium term, is still too high for comfort.

Buoyant tax revenues combined with a bumper dividend from the Indian central bank have given the government headroom to spend more even while keeping the fiscal deficit well under control. The granular numbers point to the possibility of an interesting shift.

The Modi government has been spending a growing slice of its revenues on capital expenditure that not only generates demand in other parts of the economy through a high multiplier, but also eases some of the supply constraints on Indian producers. However, the finance minister has announced no change in the capital expenditure budget compared to the interim budget, other than a small increase in the interest-free loans given to the states for infrastructure.

There are two possible reasons why the capital spending budget has been held constant compared to February. First, four months into the fiscal year, it will be tough for ministries to suddenly increase spending on projects that need a lot of planning. It is a question of state capacity. Second, the government has decided that the compression in revenue spending in recent years has gone too far. Budgeted revenue spending will be ₹0.55 trillion higher than what was estimated in February, while the capital spending estimate has not changed.

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Budget theme

One running theme in the budget is an attempt to raise labour incomes — be it through wage subsidies, direct measures to boost employment, support for small enterprises that create jobs, lower income tax rates. The government has done well to provide these incentives for employment generation or skilling rather than focus on income support schemes such the rural jobs scheme, the free food scheme and the direct transfers of money to farmers. The latter provide immediate benefits. The former tries to address a stark challenge that will take years to deal with.

There is a macroeconomic backstory to this. The splendid economic recovery after the pandemic has been led by corporate profits rather than household incomes. Weak job creation combined with anaemic growth in real wages have undermined consumer spending, which grew at half the rate of the overall economy in 2023-24. Some of these issues undoubtedly played a part in the results of the recent national election, and the setback that the ruling alliance got in many parts of the country.

Meanwhile, insipid consumer demand has ensured that companies have preferred to use their profits to build cash reserves or pay off old debts rather than invest in new capacity. The result of this feedback loop from consumer demand to corporate investments is growing concerns about the state of aggregate demand in India.

Shifting focus

The many variants of wage subsidies announced in the new budget should be juxtaposed with the capital subsidies through the Production Linked Incentive (PLI) scheme in recent years. It is premature to say that the third Modi government has shifted from policies that ease constraints on the supply side to measures that seek to boost the demand side — but some early signs of rebalancing are evident.

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Budget 2024 meets the realities of India. It builds on the hard-won macroeconomic stability in recent years with a new recognition that a two-speed economy has led to demand pressures.

The first budget of a new government is not just a matter of financial numbers for one year. It is also expected to provide pointers to fiscal strategy over the next five years. India has to accelerate its economy, create quality jobs, increase spending on items such as education, health, defence, public goods, and climate change mitigation.

Whether it can do so while strengthening public finances will depend on the ability of the government to raise more taxes for every unit of GDP. The promise by the finance minister to streamline both direct as well as indirect taxes is a step in the right direction.