Election results and economic realities have shaped this budget

To an extent, the 2024–2025 Budget measures were influenced by the general election results. The higher allocations to Bihar and Andhra Pradesh were the most obvious manifestations. However, the other priorities, while likely given a bit more urgency post-elections, are based on unfolding economic trends that have evolved into major concerns over the last few years. 

The finance minister began her speech by listing four key themes of the Budget planning: employment, skilling, MSMEs, and the middle class. These were detailed into nine actionable priorities, which the forward-looking vision plan intends to use as drivers of sustained growth. 

Regarding growth and the overall economy, the Economic Survey forecast inflation-adjusted financial year 2024-2025 gross domestic product (GDP) growth at 6.5–7 per cent (lower than the Reserve Bank of India’s 7.2 per cent). Economic activity remains robust, with industrial activity, manufacturing and service exports, airline traffic, hotel stays, and many others remaining strong. Although growth in these indicators is slowing, they remain healthy. The stock markets have crossed historical highs almost every month, and despite the stretched valuations, domestic household savings continue to pour in every month. 

However, underlying this robust outlook on growth is a rising unease about the distribution of the benefits. Data on income and wealth inequality, particularly over time, is scarce and disputed. GDP data shows household consumption growing slower than the aggregate. Rural consumption, in particular, has reportedly remained muted, as evidenced by almost stagnant rural wages adjusted for inflation. Rural inflation remains much higher than urban inflation, eating into the already lower disposable incomes of rural families, despite large and medium-sized corporations holding large cash reserves. 

The proximate reason for muted consumption demand has been the lack of incremental quality, well-paying jobs. Official data shows an increasing number of additional jobs come from “casual labour” or “self-employed” rather than “salaried.” Even among the salaried classes, an increasing number are contract workers. None of the categories have pensions or benefits, and they remain vulnerable to losing their jobs in economic downturns. 

These are the proximate reasons for the thrust areas of the Budget. Regarding personal income taxes, taxpayers opting for the new regime are reported to have a lower tax liability of Rs 17,500 per annum. This will come from, among others, an increased standard deduction from Rs 50,000 to Rs 75,000 and changes in income-slab-wise tax rates. This is estimated to benefit four crore salaried taxpayers. The hope is that this lower tax liability and higher disposable incomes will lead to additional spending on consumer goods, contributing to sustained growth. 

On the other hand, a rising concern over the past 3–4 years has been a flood of money from retail investors into stock markets. Initially, this flow was largely through mutual funds, but it has recently shifted to direct stock investing and, more concerningly, speculative futures and options (F&O) derivatives. Regulators now say that this huge rush of retail investors is leading to a diversion of household savings from productive investments into speculation. 

This has led to a five-fold increase in the Security Transactions Tax on F&O trades from 0.02 per cent to 0.1 per cent, a hike in the Short-Term Capital Gains (STCG) tax from 15 per cent to 20 per cent, and an increase in the Long-Term Capital Gains (LTCG) tax from 10 per cent to 12.5 per cent. These changes will result in a net revenue loss of Rs 37,000 crore due to the personal income tax changes and a gain of Rs 30,000 crore via the capital gains tax increases. The government also estimates losing another Rs 8,000 crore with the reductions in indirect taxes on goods. Broadly, households stand to net gain only about Rs 15,000 crore in disposable incomes, a very small amount relative to total private consumption (0.08 per cent). 

The MSME sector, particularly the micro and small segments, was another focus area since it overlaps with the concerns of lagging consumption and a lack of well-paying jobs. Recently released government data showed 6.5 crore unincorporated enterprises employing 11 crore workers in 2022-2023; these comprise the informal sector and will be key to future job creation. Other than being hobbled by onerous bureaucratic compliance and regulations, one key reason for these small enterprises not scaling up (and integrating into the supply chains of medium and large corporates) has been a lack of access to formal credit. Interest rates on loans from money lenders are exorbitant. The action plan in the Budget “formulates a package covering
financing, regulatory changes, and technology support to help them grow and compete globally.” A key component is a credit guarantee scheme for manufacturing MSMEs and a self-financing guarantee fund.
There are other incentives to increase bank loans to this segment, including higher MUDRA loan limits and better working capital management.

Finally, a failure of mass-level job creation has become the biggest elephant in the room for muted consumption and the ability to grow at a sustained 7%+ for the next 25 years. The focus, front and centre, of the government’s vision, as communicated in the Budget speech, is to incentivise well-paying employment opportunities, much of this through skilling. The Budget has an outlay of Rs 1.48 lakh crore in FY25 for education, employment and skilling and targets 4.1 crore youth opportunities over the next five years. An employment-linked incentive scheme for companies is a key pillar, focusing on first-time employees, with the obvious intent of encouraging hiring in the formal sector. 

The effectiveness of these strategies will ultimately depend on their implementation. Circling back to the nine priorities mentioned earlier, these will present formidable challenges. The government recognises that collaboration between the Centre and states will be key to effective implementation.

(The writer is a Senior Fellow, Centre for Policy Research)
(Syndicate:The Billion Press) 

Union Budget 2024 LIVE | Making a record for any Finance Minister, Nirmala Sitharaman presented her 7th consecutive Union Budget on July 23, 2024 under the Modi 3.0 government. This Budget brought tax relief for the middle class, while focusing on jobs through skilling, incentivising employers. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.