Union Finance Minister Nirmala Sitharaman at the Parliament complex before presenting the Budget 2024. (Express photo by Praveen Khanna)
Economists had offered several suggestions on how best to use the surplus funds from the RBI in the budget. It has used the bulk of the surpluses to lower the fiscal deficit ratio which stands now at 4.9 per cent for FY25. It appears, therefore, that fiscal prudence was the starting point of the budget. It will become easier for the government now to target 4.5 per cent next year.
Allocations have been spread across all segments. The total outlay has not changed much from the one in the interim budget. The funds have been channelled to agriculture and rural development, housing, and MSMEs – they are at the centre of the job creation objective. It can be said that the expenditures have been made to work better in terms of generating employment. This includes the direct payments to be made by the government for first-time employees, based on provident fund data. Incentives have been given to employers too for increasing employment.
How can individuals view this budget? It has looked only at the new income tax regime and not spoken of the old one. It has stated that two-thirds of taxpayers have opted for this alternative. Benefits have been given in terms of an increase in standard deduction and tax slabs have been tweaked. In effect, the FM stated that there would be a gain of Rs 25,000 as standard deduction and Rs 17,500 per annum on tax saved. This is a big plus as it will increase income and hence give people the option to either consume or save the amount. In the extreme case of adjusting for inflation, this will protect real disposable income. Therefore, there are benefits for the common man. It also gives the message that the government would like everyone to migrate to the new scheme.
The market reaction has been ambivalent. The stock market fell towards the end of the speech when the tax proposals were announced, but recovered subsequently. The announcement on higher long-term capital gains tax did create some dissatisfaction. But the corporate sector seems to have been assuaged by the benefits in the budget – the angel tax being abolished, the tax rate being lowered for foreign companies and the several rationalisations in customs duty.
From the macro point of view, the government has not changed any assumptions and hence, is still conservative with the GDP growth rate of 10.5 per cent. This fits in with the Economic Survey’s projection of a 6.5-7 per cent growth in real GD, which leaves inflation in the region of 3.5-4 per cent. This could be a conservative estimate to begin with as it does appear that the economy will grow at a higher rate of 7.3-7.4 per cent, in which case, it will benefit the fiscal deficit ratio which can come down further with the increase in the denominator.
Will the budget lower inflation? The answer is mixed — there are no measures to directly lower prices and the reduction of customs duties on a series of items can help to lower prices provided producers pass on the benefits. Hence, the core inflation component can see relief, though not very significant. However, higher disposable income and marginally lower inflation can increase spending power, which will work well for the economy.
One area which will continue to receive a boost would be the housing sector. While the schemes are already there and running effectively in the last seven to eight years, the affordable segment in both rural and urban areas would benefit from the thrust given by the government. There could be some delay in this taking off as individuals may be waiting for interest rates to come down before going in for such investments. But the real estate sector and related industries like steel, cement, machines, glass and chemicals will likely see additional traction on this score. This is notwithstanding the fact the government has not increased the capex from what was announced in the Interim Budget.
The commitment to persevere with existing social welfare policies continues. With employment generation at the forefront and the emphasis on education and skilling, there is a definite change in approach to improve the quality of growth. The fact that the economy is doing well is given. But there is scope to improve the quality of this growth which requires a more skilled labour force. The budget addresses this issue.
On the whole, the budget has been progressive. The Interim Budget provided the right set of incentives and the relief provided in the FM’s speech carries these measures forward.
The writer is Chief Economist, Bank of Baroda. Views are personal
