Between Finance Minister Nirmala Sitharaman’s presentation of the interim budget on 1 February and the Union budget on 23 July, the main event was the Lok Sabha election that brought the BJP-led NDA back to power but with a reduced majority. The impact of this sole event is evident in the differences between the two budgets, which not only inform us about the shift in the Narendra Modi government’s stance towards fiscal policy but also tells us how the ruling party is reading the election results and what it intends to do about them.
Here is how the two budgets compare in terms of allocation and what they reveal are the government’s priority areas.
There are only a few changes in expenditure allocations, and most of them can be linked to the areas that the finance minister emphasised in her budget speech.
The biggest change is in the budgeted transfers to the states. For ‘special’ and other ‘need-based assistance’ for which budget provision is not made, the Centre earmarked only Rs 4,000 crore in the interim budget; but in the Union budget, this has been raised to Rs 20,000 crore. The other is zero interest loans for capital expenditure for 50 years, which basically makes them a grant. For this, the government has allocated Rs 1,50,000 crore in the Union budget, up from Rs 1,30,000 crore in the interim budget. These as well as the emphasis on certain states in the finance minister’s speech reflect the realities of coalition politics. The Modi government wants more freedom of action in making transfers to the states.
Another difference is in the allocation for the price stabilisation fund (PSF) scheme, which will be used for “maintaining buffer stock of pulses, onions and potatoes and making sufficient availability of said commodities in the market so as to cool down the prices as and when required”. From no expenditure made in the last two years and no allocation in the interim budget, the government has moved to allocating Rs 10,000 crore to this fund, the biggest so far. Perhaps the government is expecting some of these commodities to see high inflation and is willing to absorb some losses to bring down the prices.
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Priority areas
The finance minister’s speech emphasised employment and skilling, with new allocations. About Rs 10,000 crore has been allocated for a new Employment Generation Scheme. Sitharaman announced three schemes. The first is a subsidy of up to Rs 15,000 to people entering the workforce in the formal sector, which would be given as a direct benefit transfer in three instalments. The second is to incentivise additional employment in the manufacturing sector, linked to the employment of first-time employees, by providing an incentive directly both to the employee and the employer with respect to their EPFO contribution in the first four years of employment. The third scheme provides reimbursement to employers up to Rs 3,000 per month for two years towards their EPFO contribution for each additional employee. There is Rs 2000 crore for a new internship programme to be implemented by the department of consumer affairs. The government has also allocated Rs 1,000 crore for a new ITI upgradation scheme.
The other areas of priority mentioned in the budget speech are productivity and resilience in agriculture, inclusive human resource development and social justice, manufacturing and services, urban development, energy security, infrastructure, innovation, research and development, and next-generation reforms. These have either not translated into any change in allocation (perhaps because the allocation in the interim budget was deemed adequate) or have led to relatively small changes.
Under the priority area of energy security, the government has allocated Rs 6,250 crore for PM Surya Ghar Muft Bijli Yojana, which was launched earlier this year. For urban development, there is an additional allocation of Rs 4,000 crore for housing under the Pradhan Mantri Awas Yojana (Urban). While the first area that Sitharaman had emphasised in her budget speech was agriculture, the only major change in allocation towards this sector is Rs 4,700 crore for the Pradhan Mantri Annadata Aay Sanrakshan Yojana, under which remunerative prices are supposed to be provided to farmers. Further, while the government has continued the emphasis on infrastructure expenditure, the only major change in allocation from the interim budget is an additional allocation of Rs 6,000 crore for road works.
Overall, most of the allocations in the Union budget are same as those in the interim budget. The only major deviations are in additional allocations for special assistance to states, which will likely be used for states ruled by BJP allies at the Centre, an acknowledgement of the need to do more for employment creation, and in an allocation for price stabilisation. Since the Union budget envisages additional expenditure of Rs 54,744 crore over the expenditure budgeted in the interim budget, most of the additional allocations to the purposes and schemes discussed above did not require a reduction in allocations in other areas. Since the 2024 Lok Sabha election results were contrary to the government’s expectations, there was a chance that the government may opt for major changes in allocation. However, the overall thrust of the expenditure strategy remains the same. Even the allocation for capital expenditure is the same.
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Business as usual
Beyond the allocation, the approach to using instruments of fiscal policy for addressing development problems also remains largely the same. On employment, for instance, the focus is on subsidies and direct benefit transfers, which have been the government’s preferred instruments for most policy problems. The design of these schemes needs to be tested though. For instance, the direct benefit transfer to the first-time workers comes with the condition that if the worker is fired in the first year, the employer will have to reimburse the subsidy to the government. Since the benefit goes to the employee while the consequence of firing is on the employer, on the margins, this places an additional burden on the employer rather than reducing the cost of hiring.
On the receipts side, the only major change is in the non-tax revenue. On account of a much larger dividend from the Reserve Bank of India (RBI) than was budgeted in the interim budget, the budgeted receipt on non-tax revenues is about Rs 1.46 lakh crore higher than in the interim budget. While there are some major changes in the direct tax regime – the most important being the changes in the rate of tax on long-term capital gains along with removal of indexation — and several changes in indirect taxes, these do not add up to major changes in expected receipts. The changes to capital gains regime is riling up some of the investors, especially those who will be affected by the government’s decision to disallow indexation for assets.
Sitharaman proposed rationalisation of the customs duties in some sectors, especially on the import of intermediate goods, and announced more such changes in the coming months. Similarly, the proposal for a comprehensive review of the Income Tax Act could lead to a long-pending overhaul of direct taxes. If done properly, these might be the most impactful changes coming out of Budget 2024.
The windfall in non-tax revenue receipts has created space not just for additional expenditure but also for more fiscal consolidation. While the interim budget had pegged the fiscal deficit and primary deficit at 5.1 percent and 1.5 percent of GDP, respectively, the Union budget pegs them at 4.9 percent and 1.4 percent of GDP, respectively.
The government seems to have chosen to prudently continue the fiscal consolidation path it embarked on after the high levels of deficit during the pandemic years. The interim budget had stated that the revised estimate of the fiscal deficit and primary deficit in 2023-24 was 5.8 percent and 2.3 percent of GDP, respectively, but the provisional actuals show them to be 5.6 percent and 2 percent of GDP, respectively. Essentially, despite it being the year before the election, the government spent about Rs 59,000 crore less than it could have spent while keeping the fiscal deficit at the level presented in the interim budget. Neither keeping the deficit below the revised estimate in an election year nor continuing fiscal consolidation after losing so many seats in the election is par for the course. The government should be given credit for this.
Overall, despite the differences between the interim and Union budgets, the government appears to be maintaining its business-as-usual approach, with no major shifts in its fiscal policy stance. The tweaks in budgetary allocations add up to only about 1.5 percent of the total expenditure, and they mainly address some concerns arising from the election results. The decisions on direct taxes suggest that the government is not too worried about the blowback from the investors. The decision to continue with the infrastructure push also suggests that the government does not read into the election results a need for major consumption-boosting or redistribution schemes.
The author is Deputy Director and Fellow, Carnegie India. He tweets @suyashrai. Views are personal.
(Edited by Prashant)