PM And FM Have Got Most Things Right In A Budget With A Very Short Shelf-Life

It is paradoxical that at a time when budgets have become less and less impactful on underlying economic trends, media and political frenzy surrounding budget presentations have only increased in volume and vacuity. 

The Union Budget’s total expenditure as a share of GDP (gross domestic product) fell in Prime Minister Narendra Modi’s first tenure (2014-19), from 13.1 per cent in 2014-15 to 12.25 per cent in the final year, says economist Rathin Roy (read here).

It rose sharply during his second term because of the crash in GDP during Covid 19, but from a peak of 17.7 per cent in 2020-21, the first year of Covid, total budget expenditure has now fallen to 14.7 per cent of projected GDP in 2024-25. It will keep falling unless we see a miracle in growth and tax revenues.

The relative irrelevance of the budget to economic fortunes is particularly true of this year, an election year, as the outlays will be relevant only for around six months, or even less.

By the time Finance Minister Nirmala Sitharaman’s budget is passed by the end of this month, we will have only six months left before the next one is presented on 1 February, but in the January-March quarter of 2025, most of the spending will be determined not by budget proposals, but already visible revenue and expenditure trends.

Ministries will be asked to taper down or accelerate spending once the Finance Ministry gets a fair idea about these trends in the October-December quarter. And, if we assume that most budget schemes will not be rolled out for at least a month after Parliament passes the Finance Bill, we are talking about another effective loss of a month in this fiscal year.

That said, let us be clear on one thing: directionally there is nothing wrong with the budget’s proposals. The key proposals include a focus on jobs and skilling, maintaining the pace of infrastructure spending, and fine-tuning capital gains and tax deduction at source rates.

There are also proposals to help credit flows to micro, small and medium enterprises (MSMEs), and building more houses for the urban poor.

Alongside, the fact that the budget sticks to the path of fiscal consolidation despite having to pander to wishes of new coalition allies is truly awesome.

This means Modi fully deserves the credit for helping his Finance Minister avoid the temptation to scatter freebies in all directions against the backdrop of the setback the Bharatiya Janata Party received in the general elections, and the forthcoming assembly elections to three states (Maharashtra, Jharkhand and Haryana).

Just as the Prime Minister declined to buy his way to election victory in the February interim budget, he has stuck to his conservative fiscal instincts this time too.

Most of the criticisms of the budget proposals are wrong-headed and politically motivated. At best, they are only partially true. Let’s take them one by one and debunk them.

One, the allegation is that Bihar and Andhra Pradesh have been favoured at the cost of the other states. This is bunkum, for the bulk of the budget is about the whole country, not just these two states.

However, how can directing funds towards the poorest state in the country be morally wrong? Or helping Andhra Pradesh build a new capital? It is about righting a wrong as the Centre did not keep its commitments to the state at the time the old Andhra Pradesh was bifurcated in 2014.

The sums allocated for Purvoday states do not help only Bihar; they go to Jharkhand, Odisha and West Bengal too. Ditto for help in flood control measures, which include Himachal and Uttarakhand too.

Most important, the outlays will not all happen in this truncated budget year. They will be spread out over several years. Other states may get their dues next year.

Two, former Reserve Bank of India governor Raghuram Rajan, who is politically opposed to the Modi government, made one valid criticism about the employment schemes. He said in a TV interview that while the schemes should be tried, one cannot presume that they will work. He is right here, but also wrong.

The budget contains three schemes for employment, and two for skilling. It is unlikely that all will fail, for, effectively, what the government has done is try out many different things at some scale, and if one or two work, the next budget can increase the funding to make them work even better.

To make them work, the government should have a jobs and skilling sherpa, whose only job is to monitor the execution of these schemes, and suggest real-time correctives where needed. He must also be able to get states on board.

The mistake is to believe that the Centre must do all the heavy lifting, when states and local bodies are the real administrative entities resisting reforms that can boost employment and employability. 

Three, there has been some criticism of the fact that no real relief has been given to salaried taxpayers, but this is untrue. The new tax regime, which gives very few deductions, effectively raises the tax-free limit to Rs 7.75 lakh (including the raised level of standard deduction this year).

Maybe, the right thing to do is to index the exemption levels automatically from next year, but most political parties prefer to keep that decision to themselves, since it allows them to time the reliefs around election time.

There has also been criticism that the changes in the capital gains tax regime for various classes of assets will impact the markets and real estate. Long-term capital gains (LTCG) tax for listed shares has been hiked to 12.5 per cent and reduced for real estate to the same level.

But residential real estate has also lost the earlier benefit of cost indexation. The securities transaction tax (STT) for futures and options trade has also been raised, as has short-term capital gains from shares.

But the criticism is overblown. Two reasons why. If the long-term goal is to boost employment, there must not be excessive incentivisation of incomes from capital investment as opposed to labour.

When the top tax rate for individuals is 30-per cent-plus, and this applies to earnings from fixed deposits and debt funds, what is the logic of taxing long-term capital gains at a third of that level?

Sure, risk capital must be incentivised, but the real issue is the huge gap between the rates for incomes earned on capital and labour. Some closing of this gap is warranted, and will in fact nudge companies to employ more labour, especially when automation of jobs is also a viable option.

The sops for MSMEs and urban housing also play into the same theme of employment. MSMEs and startups (which benefit from the abolition of angel tax) will be the drivers of growth in jobs, and not big companies. 

The big point to note is that all of the budget’s schemes — whether it is about employment and skilling, support for MSMEs, urban housing or higher taxes on capital gains — align in terms of tilting the scales in favour of labour.

The budget gets more things right than wrong, and the only caveat is this simple one: it must focus on implementation, and not just outlays.