Ajit Ranade: An overdue pivot to human capital and employment

It was also the record seventh time that finance minister Nirmala Sitharaman presented a budget. Her budget proposals show admirable fiscal restraint and conservative assumptions on revenues. Even though another full budget presentation is due in six months, this was an important occasion to articulate an economic strategy.

The major thrust of the Union budget proposed for 2024-25 is on job creation and helping small businesses. The former is through employment and skilling incentives, while the latter is by providing collateral free loans to MSMEs and enabling access to export markets. There is also an increase in the tax on capital gains. 

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In some ways, one can read this as a pivot towards labour-intensive growth, which includes enhancement of human capital. For the past few years, the Union government has raised the share of spending on infrastructure such as roads and airports. These hard assets have been created at a rapid pace and are visible. 

Public spending on infra has been a significant driver of growth. But job creation has not been keeping pace, and rural wages have been stagnating. Small businesses that generate jobs have been struggling. 

The micro reality behind the economy’s macro health has been that consumer spending is growing slower than GDP, which is worrying. Instead of only providing incentives to production and revenues, the government has now focused on incentivizing job creation.

India needs to invest in human capital massively for long-term, sustainable and inclusive growth. That investment needs to reach a benchmark of 6% of GDP, which is twice of what it is now. This investment must come both from private and public resources. Public funds are necessary for funding primary education and partly also secondary education. 

The social spillover effects of it are tremendous and long-lasting. But college education and beyond, including skilling and training, cannot be funded by tax-payers. This is because the benefits of higher education and skills accrue largely to the individual and only secondarily to society at large. 

The spillover benefits of skilling and college degrees and diplomas are in terms of entrepreneurship, innovation and job cre-ation, but are still not a strong justification to provide it all free. The key challenge for skilling India is that the vast majority of the youth eager to be trained cannot afford the true cost of quality education. 

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Also, most of the skilling happens on the job. Hence, the best way is to incorporate it into a national apprenticeship programme, which has portable accreditation. Even the proposed internships for 10 million youth in top-tier companies will be a step towards learning by doing. 

The fees for skilling and higher education should be borne by the student, the primary beneficiary. It is here that the budget does well, by ensuring easy and inexpensive access to student loans. In the coming years, this should be a dominant way of funding higher education in India.

Similarly, a collateral-free loan scheme has been announced for small businesses, apart from government-provided credit guarantees. Small businesses have also been helped by e-commerce linkages to export markets. Since MSMEs account for the lion’s share of value addition in industry, exports and employment, this thrust is welcome.

Beyond jobs, skilling and MSMEs, the budget’s prominent macro feature is fiscal responsibility. The FM chose to use half of the fiscal bonanza from the Reserve Bank of India to reduce the deficit. This commitment to fiscal consolidation is commendable. 

As India is an outlier when it comes to debt servicing (a third of its tax revenues go into meeting interest expenses), fiscal prudence is very important. If anything, the assumptions made on next year’s tax revenues look conservative.

India needs a comprehensive relook at its income-tax strategy. The direct tax net needs to be much wider and tax slabs should not go from zero to the top rate within a span of just a few lakh rupees. The top tier must kick in at high incomes, say above ₹1 crore. But exemptions must go. A new comprehensive economic framework for next-gen reforms is on its way, Sitharaman said. 

This new framework must place India in an advantageous position to exploit global value chains. Hence, the trend should be towards lowering import duties across the board. The import duty on gold was cut from 15% to 6% because a lot of duty leakage was happening via the route of duty-free imports from the UAE into GIFT city. 

Besides, high duties on precious metals are eventually counter-productive, since they invite smuggling. It was also good to hear about future- looking initiatives such as the promotion of private public partnerships in the field of small modular nuclear reactors and in the space economy. It’s also good that a realistic assessment has been made of India’s difficult transition away from fossil fuels.

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Higher taxes on capital gains might be temporary spoilers for the stock market. But India’s macro performance stands out in the world for its resilience and high growth, with moderate inflation. Now with policies to incentivize job creation and skilling, along with fiscal consolidation, there is no reason why high economic growth cannot be sustained. Sooner or later, India’s financial markets will acknowledge this strength.