In her sixth full Budget for the Narendra Modi government, finance minister Nirmala Sitharaman Tuesday showed that she is fiscally prudent, bold, and politically savvy.
Her fiscal prudence is evident not just from the reduced deficit target of 4.9 per cent of gross domestic product (GDP) for 2024-25, but also from her announcement that she would align her fiscal deficit targets from 2026-27 to a declining trajectory of the Union government’s debt. The interim Budget for 2024-25 had set a fiscal deficit target of 5.1 per cent, which implied a government debt level of 57.2 per cent of GDP. Tuesday’s Budget has set a fiscal deficit target of 4.9 per cent, which should bring the debt further down to 56.8 per cent of GDP.
Of course, this debt level is still much higher than the 40 per cent target set by an official committee a few years ago. But what needs to be noted is that until Tuesday, in all her post-Covid Budget speeches till now, while there had been a focus on reducing the fiscal deficit to 4.5 per cent by 2025-26, there was no reference to the need for lowering the government’s debt level.
In the Budget speech for 2024-25, Sitharaman referred to the need to reduce the fiscal deficit at a pace that eventually brings down the government’s debt level as well. “From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP,” she said. This is a welcome and much-needed refocusing of the government’s fiscal consolidation strategy. Given the varying deficit requirements of a developing economy, the debt level is being seen as a more reliable anchor for fiscal consolidation.
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Good restraint
Sitharaman’s fiscal prudence can be gauged in another way. She has restrained herself from splurging on various schemes just because she received an extra dividend from the Reserve Bank of India (RBI) this year, which is as large as 0.4 per cent of GDP. She has rightly recognised that this could well be a one-off gain this year, and the additional dividend may not be there in 2025. Thus, in spite of that extra money this year, she has allowed the revenue outlay to go up by only 6 per cent (the actual increase without interest payments is even lower at 4.78 per cent, implying no real increase). Instead, she has maintained the rise in capital expenditure at 17 per cent. Thus, the Centre’s overall expenditure is set to rise by 8.5 per cent, even as its overall revenue would go up by about 15 per cent.
In the end, Sitharaman achieved an improvement in the quality and mix of her expenditure. Moreover, she is steadily bringing down her revenue deficit. Against 4 per cent of GDP in 2022-23, the revenue deficit in 2023-24 was slashed to 2.6 per cent and is now targeted at 1.8 per cent for 2024-25. As the revenue deficit declines, the government will have the headroom for allocating a larger share of its total borrowing for capital expenditure.
The finance minister is also bold because she has restructured taxes on capital gains from all types of assets, which effectively results in higher taxes on both short-term and long-term capital gains. Additionally, she has raised the securities transaction tax (STT) on futures and options trading in securities. Remember that the pre-Budget Economic Survey presented on Monday highlighted the risks of over-financialisation of the economy with the stock market growing at a pace faster than the real economy. The Survey also underlined the importance of tax policies and their treatment of capital and labour incomes.
What the finance minister has done with the capital gains tax regime and the STT for futures and options appears to be a response to the Survey’s concerns. But when it comes to presenting the annual Budget, finance ministers are known to be risk-averse as far as the stock markets are concerned. Few announce any taxation measure that could potentially upset the stock market. Sitharaman decided to take that risk. Unsurprisingly, the benchmark indices of domestic stock exchanges did decline sharply on Tuesday but recovered later to end the day with a marginal loss.
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Focus on jobs
The finance minister’s political savvy is visible in the way she has tried to address the concerns over jobs by announcing a series of steps where the Centre would financially help the private sector hire more people. Instead of talking about government employment, the finance minister has linked incentives to the creation of new jobs in the private sector. Her package of reforms to help micro, small and medium enterprises (MSMEs) access more loans and even allow some regulatory forbearance for financially stressed units is clearly aimed at addressing another of the Indian economy’s concerns.
More importantly, she has used the announcement of a plethora of schemes and projects for Bihar and Andhra Pradesh (which are ruled by the Union government’s coalition partners) without really allowing them to adversely impact her fiscal roadmap. Many of the schemes are in collaboration with the states and the outlays are meant to be allocated not just during the year, but over the next five years.
Such restraint is visible also in some of the Centre’s own flagship schemes like PM Kisan and Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), where the outlay has seen no increase. Expenditure on major subsidies is set to fall by about 8 per cent in 2024-25, thanks to reduced procurement of wheat and paddy and fertiliser price rationalisation. More worryingly, total defence outlay for this year has seen a decline at a time when defence preparedness should have been a priority. Meanwhile, a few of the major schemes that have seen substantial increases in outlay are those for rural and urban housing, urban transformation and health.
As for the long-term vision of the Budget, there are some reassuring messages from the finance minister. A new economic policy framework for productivity gains in different sectors, to be finalised in collaboration with the states, a comprehensive review of the Income Tax Act to make it simple, provide certainty to taxpayers and reduce disputes, and a fresh review of customs tariff to be completed in the next six months are among the promises whose fulfilment would be keenly watched. To begin with, the finance minister has already cut customs tariffs for about 50 items belonging to a dozen sectors. This spirit should be retained during the review to be completed in six months and presented, hopefully, in the next Budget.
AK Bhattacharya @AshokAkaybee is the Editorial Director, Business Standard. Views are personal.