Opinion
India’s budget does well to drive growth despite a fiscal pullback
Summary
- The budgetary provision for capital expenditure has been maintained even though fiscal consolidation will proceed apace
The Union budget was presented on Saturday in the backdrop of sluggish real growth and stubborn albeit declining headline inflation with the latest print above 5%. Real growth was at 6% in the first half of the current year (2024-25), as against 8.2% in the same period last year. A satellite concern of long standing is jobs and livelihoods. But high frequency indicators suggest that the second half of the year might show higher real growth.
For the upcoming budget year, nominal gross domestic product (GDP) has been projected to grow at 10.1% over the half year-based First Advance Estimate (FAE) for the current year, yielding a budgeted GDP denominator of ₹356.97 trillion for 2025-26. The Second Advance Estimate (SAE) for 2024-25 will soon follow at February-end, and at May-end the provisional estimate based on all four quarters. Given the shifting denominator, it is best to look at absolute figures alongside percentages.
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The current year’s fiscal deficit budgeted at ₹16.13 trillion was 4.9% of the July budget GDP estimate. The latest revised fiscal deficit is lower at ₹15.70 trillion, amounting to 4.8% of GDP by the FAE (which is lower than the July GDP estimate). For the next year 2025-26, the fiscal deficit is held at the same absolute level as the revised fiscal deficit in the current year, amounting to 4.4% of (the projected) GDP.
This is an impressive display of fiscal consolidation, although as I have frequently said, these surface figures can cover poor fiscal practices, like axing some budgeted expenditures or delaying payments to traders for goods and services delivered. Budgetary deprivation of essential public services like air traffic control can have disastrous consequences, as we have seen elsewhere in the world. But let us stay with the aggregates for now and commend the budget for having stayed on the pre-announced fiscal path.
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What does the budget do for real growth? And jobs and livelihoods? It proposes a lot of measures but in a manner that made my head swim.
The development measures span 10 broad areas; they are to be achieved through four engines (agriculture, medium and small-scale industry, investment and exports); and through reforms across six domains (taxation, power sector, urban development, mining, financial sector and regulatory reforms). I will just concentrate on one engine (agriculture) and one domain of reform (taxation).
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The Dhan Dhaniya Krishi Yojana targeting 100 low productivity districts is great in conception, and if well implemented, will surely generate both growth and on-farm employment, benefiting 17 million among the country’s poorest farmers. Annexures A, B and C set out the specifics of the initiatives in many directions, including pulses, vegetables and fruit, with attention to the taming of price volatility. There is even evidence of coherence across the initiative to increase fish production, with supportive lowering of customs tariffs on imported inputs that go into seafood exports.
Picking up on taxation reform, from among the six reform domains, a new income-tax bill has been announced for introduction next week. The new income-tax law will have different section numbering. I can hear a collective groan from chartered accountants. Did we need a radical change in the income tax law at this juncture?
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Independently of the new law (not yet seen), there is a new rate structure proposed in the Finance Bill. The zero rate income threshold is ₹4 lakh. After that, rates climb slab-wise from 5% to 30%.
The problem is a tax rebate overlaid on all this, rebating taxes payable up to an income threshold of ₹12 lakh. For an income of ₹13 lakh, the total tax payable will be ₹75,000, including ₹60,000 (accumulated up to the crossed rebate threshold) and a 15% tax on the slab immediately above that.
The marginal tax rate on that extra income of ₹1 lakh above the rebate threshold becomes 75%, punishing the honest taxpayer (although relief is promised for incomes “marginally above the rebate threshold"). A hallowed principle of public finance prescribes a single taxable threshold, with all incomes above that subjected to the relevant slab rates to avoid this kind of discontinuity in marginal tax rates.
Prior to the July 2024 Union budget, Moody’s Ratings had warned that poor water management in major cities might affect India’s credit rating. A 100-city bankable water and sanitation initiative was announced in the July 2024 budget. This budget announces an Urban Challenge Fund with 25% of the bankable project cost to be funded through the budget, for which ₹10,000 crore is provided for 2025-26. Not enough, but a start.
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The provision for 50-year loan assistance to states for capital expenditure was budgeted for the current year at ₹1.5 trillion, and is budgeted at the same level for 2025-26. This is a good scheme that strengthens the federal bond between the Centre and states, although some states are wary of it, evident from the revised estimates for the current year showing reduced offtake at ₹1.25 trillion.
Overall capital expenditure, budgeted for this year at ₹11.11 trillion, will fall short by roughly ₹1 trillion. The momentum is kept up with a budgetary provision of ₹11.21 trillion for the next year. Hopefully, we will reap the growth rewards of this continued massive outlay.
The author is an economist.
