Union Budget 2024-25: Indian Government opts for Prudent Populism

All eyes were on the Union Budget in July 2024, that came just six weeks after the General Elections. Voters, businesses, political parties, and those looking to invest in India—everyone wanted to assess what it would indicate about the NDA government’s broad policy direction in its third term and what it would hold for each section of the country and economy. And it certainly did not disappoint. Taking cues from the elections and ahead of polls in some states—such as in Maharashtra, Haryana, Jharkhand, Delhi and Bihar—the government took up issues close to the voters, the biggest being that of employment and skilling. Others include fresh avenues for funding and easier compliances for micro, small and medium enterprises (MSMEs), higher outlay for agriculture and schemes for rural development and housing that could have a multiplier effect. There was also some tax relief for the middle class. The Budget also took care of the demands of the NDA’s two key allies—the Telugu Desam Party (TDP) and the Janata Dal (United) or JD(U)—which together hold 28 seats in the Lok Sabha. Finance Minister Nirmala Sitharaman announced generous outlays for schemes and financial support to both Andhra Pradesh, where the TDP is in power, and the JD(U)-ruled Bihar. “ On balance, when this is a Budget for growth and employment generation, it was thought fit that we remove this irritant (angel tax) ” SANJAY MALHOTRA Revenue Secretary The Budget also quelled worries of economists and investors around the dynamics of a coalition government by retaining credible targets while underlining its continued commitment to fiscal consolidation. It has also affirmed the government’s reforms agenda and clarified its strategy on disinvestment. Analysts say the government has maintained its stance on abstaining from too many direct giveaways, while also announcing measures to allay the problems of common citizens. Rajani Sinha, Chief Economist at CareEdge Ratings, says the Budget has continued the government’s policy stance despite expectations of a dilution in the position due to coalition politics. “There has been higher allocation to Bihar and Andhra Pradesh but the theme of fiscal consolidation and the focus on capex has continued. Apart from a few giveaways such as higher standard deduction and the direct benefit transfer (DBT) proposal for first-time employees, there are few proposals for direct measures to boost consumption,” she says. The government has followed its past strategy of boosting consumption through indirect measures such as higher allocation for the Pradhan Mantri Awas Yojana (PMAY), she adds. Aurodeep Nandi and Sonal Varma, economists at financial services firm Nomura, believe that the Budget provides interesting insights on how the government is rethinking its economic and political priorities after the elections. “We have identified six key ‘rethinks’ in the Budget: on jobs and skills; on political priorities; on middle class taxes; on corporate support; on reforms; and on medium-term fiscal rules,” they said in a report. Focus on Youth The biggest focus of the Budget has been on employment and skilling. Job creation has not kept pace with the rising workforce due to factors including lower private investments, Covid-related shocks as well as issues of employability. After weeks of inter-ministerial deliberations and consultations with stakeholders, the Budget announced five schemes and initiatives as part of the Prime Minister’s package on employment and skilling with a massive central outlay of Rs 2 lakh crore that is expected to facilitate employment, skilling and other opportunities for 41 million youth over a five-year period. In her Budget speech, Sitharaman said that three of the schemes have employment-linked incentives (ELI) and are based on enrolment in the Employees’ Provident Fund Organisation (EPFO), focus on recognition of first-time employees, and support to employees and employers. Lohit Bhatia, President of Workforce Management at staffing company Quess Corp, notes that the big differentiator in this Budget in terms of job creation is the focus on formal employment generation. “Formal employment not only gives a regular wage but also a degree of social security by being enrolled in the EPFO,” he points out. “ The way property prices have gone up, the new capital gains tax regime will be beneficial. In cases where a person has sold a property and purchased a new one, then the roll-over benefit is also available ” RAVI AGARWAL Chairman, CBDT The Budget has also taken care of challenges around housing and childcare for women workers by announcing setting up of working women hostels in collaboration with industry and establishing crèches. Schemes for skilling, setting up of industrial parks and dormitory-type housing for industrial workers are also expected to give a boost to job creation. The finer details and nuances of these schemes are expected in the coming months after further stakeholder consultations once the Budget and Finance Act, 2024, are approved by Parliament. For now, the Budget has allocated Rs 10,000 crore to the labour ministry and Rs 2,000 crore to the Ministry of Corporate Affairs for these schemes, for this fiscal. Measures for MSMEs, Taxpayers MSMEs—one of the building blocks of the economy because of their huge contribution to manufacturing as well as employment generation—were another priority of the Budget. The space had registered a series of shocks in the past few years. The Finance Minister has announced a number of measures to support them, including a new credit guarantee scheme, a new assessment model for credit that will be used by banks based on the business’s digital footprint, credit support to MSMEs during their stress period as well as enhanced MUDRA loans for eligible borrowers. Taking forward the theme of something for everyone, the Budget announced tax relief for almost all classes of taxpayers, though the reaction to these proposals have been mixed, given the announcements around the simplification of the capital gains tax regime and taking away of the indexation benefit for real estate. There remain concerns that this could lead to a higher tax outgo on sale of property as well as a return to transactions with a cash component. Ravi Agarwal, Chairman of the Central Board of Direct Taxes (CBDT), rules out any rethink on the long-term capital gains tax on property that has been lowered to 12.5% from 20% without the benefit of indexation. He says the issue should be seen in the context of property appreciation and the ultimate tax liability. “Instead of just being guided by some calculations, we have to see the ground reality,” he says, adding that the way property prices have gone up across regions, the new capital gains tax regime will be beneficial. “In cases where a person has sold a property and purchased a new one, the roll-over benefit is also available,” he says, while rejecting concerns of an increase in the cash component in property transactions. “A lower tax rate will be beneficial to all.” The proposed increase in the rate of securities transaction tax on futures and options of securities to 0.02% and 0.1% respectively also briefly impacted market sentiments. The government hopes that this nudge will make taxpayers move to other investment options amidst concerns over rising participation by retail investors in stock markets, especially derivative trading, which was also highlighted in the Economic Survey. “ Value creation is at the core of our approach, and the disinvestment strategy should be more calibrated and should be subservient to that rather than an end in itself... We are also trying to align it towards market management ” TUHIN KANTA PANDEY Secretary, DIPAM But the withdrawal of the angel tax, an issue highlighted by Business Today earlier, is expected to give relief to foreign investors and the country’s budding start-up ecosystem that has found it difficult to bring in capital to build on their growth plans. Revenue Secretary Sanjay Malhotra explains that while the angel tax was an anti-avoidance measure to deter money laundering, it was impacting investments. “It is difficult and impossible to value companies objectively,” he tells BT, adding that though there are very few instances of incorrect application of the tax, the “ramifications and impact are much more”. “On balance, when this is a Budget for growth and employment generation, it was thought fit that we remove this irritant,” he adds. For the middle class, too, the Finance Minister has announced a slew of measures, including a rejig in income tax slabs, an increase in standard deduction to Rs 75,000 from Rs 50,000, as well as higher deduction of Rs 25,000 for family pension. All these benefits are available under the new income tax regime and could save annual tax of up to Rs 17,500 for individuals, which could give a marginal push to disposable incomes and consumption demand. The FM has also promised a review of the Income Tax Act and customs duty over the next six months and has announced that efforts would be made to further simplify the GST structure and expand it to the remaining sectors. Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes and Customs (CBIC), points out that a Group of Ministers under the GST Council is undertaking a review of the rate structure and a possible rationalisation of the rates to three slabs. “They are working on it, and they will try to do it quickly because that is the ask now as GST has stabilised. The tax regime is seven years old now and the revenue is also good. Now there is need for this kind of reforms,” he says. Coalition Math The BJP-led NDA government may have refrained from granting special status to Andhra Pradesh and Bihar, but it did make up for that by bestowing adequate largesse on them to keep its key allies satisfied. The measures include a number of infrastructure projects for Bihar, an industrial corridor, tourism projects as well as additional capital allocation and external assistance through multilateral development agencies. In terms of project spends, these add up to about Rs 59,000 crore for the state. Andhra Pradesh, too, has been allocated similar benefits as well as special financial support through multilateral development agencies of Rs 15,000 crore for FY25. Analysts and policy watchers say this was expected given that they are key political allies. But the FM has highlighted that every state has received adequate attention in the Budget. A report by HDFC Bank notes that the total transfer to states in the Union Budget is projected to increase by Rs 74,439 crore from the Interim Budget. “This accounts for both higher tax devolution (due to higher total tax receipts) and ‘other transfers’ which includes transfers to states like Bihar and Andhra Pradesh and slightly higher allocation for interest free capex loans (targeted at Rs 1.5 lakh crore),” it said. “ They (a GoM) are working on [GST rate rationalisation], and they will try to do it quickly because that is the ask now as GST has stabilised. The tax regime is seven years old now and the revenue is also good ” SANJAY KUMAR AGARWAL Chairman, CBIC The Macro Picture Getting a thumbs up from investors, the government has ensured that the Budget remained credible, if a little cautious on its projections on revenue collections and other receipts. The Economic Survey presented on the eve of the Budget pegged GDP growth at 6.5-7% in FY25, which is lower than the Reserve Bank of India’s forecast of 7.2%, as also of many other agencies. Chief Economic Advisor V. Anantha Nageswaran said the Survey is optimistic but remains mindful of the several challenges including the progress of the monsoon as well as geopolitical developments. The Union Budget also retained the Interim Budget’s nominal GDP growth projection of 10.5% for FY25. But RBI’s bumper dividend gave it the fiscal space to target reducing the fiscal deficit to 4.9% of the GDP in FY25 as against the Interim Budget projection of 5.1%, and also to increase revenue expenditure on schemes for employment, housing and rural road construction under the Pradhan Mantri Gram Sadak Yojana. The higher revenue spending on these is expected to give consumption a boost in the medium term and put more money in the hands of the rural populace. Nomura said in the report that Budget assumptions are largely credible and the fiscal deficit target is achievable. Compared to the Interim Budget presented, there has only been minor tweaking in the tax collection targets in the Union Budget for FY25, though the actual mop-up in FY24 exceeded the Revised Estimates. Clarifying the government’s stance on disinvestments, the Finance Minister underlined that decisions taken by the Cabinet on strategic sales will be honoured, although the timing of these will be decided by the government. “Value creation is at the core of our approach, and the disinvestment strategy should be more calibrated and should be subservient to that rather than an end in itself. We are also trying to slightly de-link it from the fiscal deficit management approach and align it towards market management,” Tuhin Kanta Pandey, Secretary at the Department of Investment and Public Asset Management (DIPAM), tells Business Today. Dividends from PSUs and disinvestment receipts together are estimated to bring in a little over Rs 1 lakh crore this fiscal. Challenges Ahead However, the path is not without challenges. Experts believe that while the intentions of the Budget are good, actual implementation and the impact on the ground would have to be seen and could take place over the next few years. There are already murmurs about how the ELI schemes would work and whether enough jobs would be created in the private sector. But Quess Corp’s Bhatia believes that it is clear from the Budget initiatives that the government has heard the industry and also has an ear to the ground. “The fruition of many of these schemes could take a couple of years,” he says. With just about seven months of FY25 left, the multiplier effect of increased allocations will also have to be watched, and how much of the Rs 11.1-lakh crore capex budget is spent will have to be seen. In FY24, the actual capex as per the provisional accounts was lower at Rs 9.48 lakh crore compared to the Budget Estimates of Rs 10 lakh crore and the RE of Rs 9.5 lakh crore; this was largely due to the Model Code of Conduct coming into play in the last few months of FY24. “The economy seems to be on track for 7% growth,” says Sinha of CareEdge, adding that growth is not a concern. “But the quality of growth in terms of inclusivity, employment and consumption demand are concerns,” he says. The FM and her officials have done their bit. A lot would depend on the line ministries, the private sector, and other factors including a normal monsoon and global developments. While growth is no longer a concern, inclusivity and equity are the key deliverables. @surabhi_prasad