Union Budget -- The Hits and The Misses
This budget tackles inequality and economic stability through two key approaches: raising taxes on capital incomes, such as STT, capital gains, & removing indexation on real estate gains—and encouraging formal sector employment alongside support for MSMEs and agriculture.
- Aug 7, 2024,
- Updated Aug 7, 2024 1:46 PM IST
The Budget 2024-25 marks a significant milestone as the first budget under a coalition government in over a decade, a trend reminiscent of the Indian polity since 1989. This period historically coincides with India's fastest decline in poverty and rapid economic growth, suggesting that coalition governments have successfully steered the nation toward prosperity.
However, this era has also seen a sharp rise in inequality, placing India among the most unequal countries globally, surpassing even many Latin American nations. Addressing this inequality, alongside the urgent need to harness the demographic dividend by generating 78.5 lakh jobs annually until 2030, remains a pressing challenge.
This budget tackles inequality and economic stability through two key approaches: raising taxes on capital incomes, such as STT, capital gains, & removing indexation on real estate gains—and encouraging formal sector employment alongside support for MSMEs and agriculture. The increased taxation on capital incomes is commendable, as it not only addresses inequality but also curbs excessive risk-taking and speculation in financial markets, which have recently reached unprecedented levels.
Both the RBI and the Economic Survey have highlighted these concerns. By mitigating financial market volatility, these measures could help prevent economic destabilization, as seen in Japan in 1990 and the U.S. during the 2007-08 financial crisis.
The Indian financial markets have seen a massive increase in participants. With so many mobile apps, investing in stock markets and mutual funds has become very easy, which could contribute to asset price inflation. The market capitalisation as a percent of GDP has more than doubled over the last decade. The 20-year median for the ratio is around 80%, and its current value is close to 135%, suggesting that market valuations are higher than the 20-year history.
This is worrisome as it indicates the bubbling of the market. The last it reached similar levels was just before the 2007 crisis, and there was a significant correction in the market after that.
Here, private consumption and investment as a proportion of GDP are not showing a significant upward trend, and capacity utilization has yet to reach a level that would guide private investment to rise. In this context, what drives the euphoria in the markets needs to be clarified. It likely indicates increasing concentration across sectors (Business Standard, July 8, 2024). This further highlights the need to regulate the markets to curtail rent-seeking behavior. Another significant priority announced in the Budget relates to resilience in agriculture. One of the drivers of high inflation in the country is food prices, which RBI cannot address through its inflation-targeting framework. This should be in the domain of fiscal policymakers and more of a development issue.
Raising agricultural productivity and output would help reduce inflation and rural poverty, as that's the best antidote for it. This would also enhance farm incomes and their demand for industries and services, which could stimulate inclusive growth further. The focus on employment could be more robust; most pronouncements are symbolic. The intention is in the right direction, but the policies announced provide a short-term nudge to employers to step up the recruitment of new workers. It is unclear whether these would be adequate to stimulate significant job creation in the economy.
India's youth are in dire straits and need support at this crucial juncture. Lots of social unrest is a manifestation of this, which we should recognize and harness in a positive direction. The increased support for MSMEs and the agricultural sector could be more effective in creating opportunities. On the flip side, two issues must be highlighted to steer the country towards Viksit Bharat. Given the likely challenges in creating adequate employment opportunities, it would be prudent to explore the possibility of introducing an urban employment guarantee scheme. This scheme, if implemented effectively, could provide a ray of hope in the face of emerging challenges from climate change. It could be tagged to this programme to ensure effective utilization of the resources that would need to be deployed. This will give dignity to the youngsters to engage in the development of the country and would stimulate the economy too. Traffic congestion and localized pollution demand urgent action, and introducing pilots for 'congestion pricing' in partnership with state and local governments is a crucial reform. The Budget could have emphasized this initiative to alleviate pollution and traffic in our cities, which have become major choke points. A small charge, introduced after a dedicated awareness campaign, would help gauge public perception and highlight the benefits, such as time savings and reduced fuel consumption. The revenue generated could be invested in improving public transport, making this a low-hanging, win-win solution that the government should champion to secure a sustainable future.
The author is professor (Dr) Sunil Ashra, Economics and Public Policy, MDI Gurgaon
The Budget 2024-25 marks a significant milestone as the first budget under a coalition government in over a decade, a trend reminiscent of the Indian polity since 1989. This period historically coincides with India's fastest decline in poverty and rapid economic growth, suggesting that coalition governments have successfully steered the nation toward prosperity.
However, this era has also seen a sharp rise in inequality, placing India among the most unequal countries globally, surpassing even many Latin American nations. Addressing this inequality, alongside the urgent need to harness the demographic dividend by generating 78.5 lakh jobs annually until 2030, remains a pressing challenge.
This budget tackles inequality and economic stability through two key approaches: raising taxes on capital incomes, such as STT, capital gains, & removing indexation on real estate gains—and encouraging formal sector employment alongside support for MSMEs and agriculture. The increased taxation on capital incomes is commendable, as it not only addresses inequality but also curbs excessive risk-taking and speculation in financial markets, which have recently reached unprecedented levels.
Both the RBI and the Economic Survey have highlighted these concerns. By mitigating financial market volatility, these measures could help prevent economic destabilization, as seen in Japan in 1990 and the U.S. during the 2007-08 financial crisis.
The Indian financial markets have seen a massive increase in participants. With so many mobile apps, investing in stock markets and mutual funds has become very easy, which could contribute to asset price inflation. The market capitalisation as a percent of GDP has more than doubled over the last decade. The 20-year median for the ratio is around 80%, and its current value is close to 135%, suggesting that market valuations are higher than the 20-year history.
This is worrisome as it indicates the bubbling of the market. The last it reached similar levels was just before the 2007 crisis, and there was a significant correction in the market after that.
Here, private consumption and investment as a proportion of GDP are not showing a significant upward trend, and capacity utilization has yet to reach a level that would guide private investment to rise. In this context, what drives the euphoria in the markets needs to be clarified. It likely indicates increasing concentration across sectors (Business Standard, July 8, 2024). This further highlights the need to regulate the markets to curtail rent-seeking behavior. Another significant priority announced in the Budget relates to resilience in agriculture. One of the drivers of high inflation in the country is food prices, which RBI cannot address through its inflation-targeting framework. This should be in the domain of fiscal policymakers and more of a development issue.
Raising agricultural productivity and output would help reduce inflation and rural poverty, as that's the best antidote for it. This would also enhance farm incomes and their demand for industries and services, which could stimulate inclusive growth further. The focus on employment could be more robust; most pronouncements are symbolic. The intention is in the right direction, but the policies announced provide a short-term nudge to employers to step up the recruitment of new workers. It is unclear whether these would be adequate to stimulate significant job creation in the economy.
India's youth are in dire straits and need support at this crucial juncture. Lots of social unrest is a manifestation of this, which we should recognize and harness in a positive direction. The increased support for MSMEs and the agricultural sector could be more effective in creating opportunities. On the flip side, two issues must be highlighted to steer the country towards Viksit Bharat. Given the likely challenges in creating adequate employment opportunities, it would be prudent to explore the possibility of introducing an urban employment guarantee scheme. This scheme, if implemented effectively, could provide a ray of hope in the face of emerging challenges from climate change. It could be tagged to this programme to ensure effective utilization of the resources that would need to be deployed. This will give dignity to the youngsters to engage in the development of the country and would stimulate the economy too. Traffic congestion and localized pollution demand urgent action, and introducing pilots for 'congestion pricing' in partnership with state and local governments is a crucial reform. The Budget could have emphasized this initiative to alleviate pollution and traffic in our cities, which have become major choke points. A small charge, introduced after a dedicated awareness campaign, would help gauge public perception and highlight the benefits, such as time savings and reduced fuel consumption. The revenue generated could be invested in improving public transport, making this a low-hanging, win-win solution that the government should champion to secure a sustainable future.
The author is professor (Dr) Sunil Ashra, Economics and Public Policy, MDI Gurgaon