If one were to formulate a “Sitharaman’s Law of Budget”, it might be: “The impact of her budget tends to be modest on the market but meaningful on the economy.”
Data from the past seven years supports this hypothesis.
Nirmala Sitharaman is the first finance minister in India to present seven consecutive budgets. On the previous six occasions, the BSE Sensex closed on the budget day at -0.2 per cent, 0.2 per cent, 0.01 per cent, -1.3 per cent, 1.4 per cent, and 0.01 per cent, respectively, yielding a meagre average daily return of 0.02 per cent. This year’s budget was no different, with the Sensex ending the day down 73 points, translating to a return of -0.09 per cent. Even the day after the budget, the Sensex continued to languish in negative territory.
While the market has repeatedly underestimated the impact of her budget, the economy has not. The 2023-24 Economic Survey points out that “the Indian economy is on a strong wicket and a stable footing.” During her tenure, the Indian economy has been characterised as a “Goldilocks economy” — a term describing the ideal state for an economy — with rapid growth, low and falling inflation, a declining fiscal deficit, a modest external deficit, a stable currency, and a positive and strong economic outlook.
Even though the stock market seems to go sour on budget day, it has soared in the medium term. During Sitharaman’s time as finance minister, the BSE Sensex has more than doubled from 36,000 to 80,000, yielding an average annual return of nearly 15 per cent.
Will her seventh budget continue the tradition of being modest on the market (in the short term), but momentous for the economy (in the medium term)? The answer is yes, for the following four reasons.
One, it keeps advisors close, and voters closer. The 2024-25 Budget acknowledges that despite rapid growth and macro-stability, there are serious structural challenges in the economy. The agriculture sector is in distress, the labour market is not creating adequate jobs for the youth and women, MSMEs and the informal sector have stagnated, and foreign investors remain hesitant. These insights did not come from government advisors but from voters. Full marks to the North Block mandarins for recognising these inconvenient truths about the economy. Identifying the problem is the first critical step in solving it, so the budget should be praised for focusing on the areas that need the most attention.
Two, it stays the course on macro-stability. The budget avoids the temptation of spending the dividends received from the RBI and growing tax revenues on populist schemes. Instead, it aims to expand the tax base, maintain investment momentum, reduce fiscal deficits, and commit to lowering the government debt-to-GDP ratio in the medium term. These measures should further contribute to macro-stability, encourage greater foreign investment, strengthen the case for rating upgrades, and possibly convince the RBI to cut interest rates earlier than expected, all of which will bode well for economic growth.
Three, it is better to try and fail, than to never try. It is rare to see a budget putting “job creation” at its centre. Economists are good at recommending policies to boost growth but struggle to suggest policies that create jobs. The task was made more difficult as some experts continued to insist that the economy is creating adequate jobs, denying the existence of any employment problem in the country. The government, to its credit, went against such advice to announce six new schemes with a two-lakh-crore outlay to create jobs and upgrade skills. Given the complicated design structure, these schemes are bound to face teething problems and significant implementation challenges. But it’s better to at least attempt a solution, even if it doesn’t work. So, kudos to the government for exploring heterodox solutions to India’s job problem.
Four, there is a pivot on trade and investment policies. After years of mixed signalling, this year’s budget tries to pivot towards gradual liberalisation of trade and investment regimes. Customs duties have been reduced, albeit selectively. The corporate tax rate on foreign companies has been lowered, the additional equalisation levy has been removed, and the angel tax for start-ups has been abolished. These measures will help domestic founders and their mostly foreign backers. One hopes these are the start of steady reforms to continue opening the Indian economy to global competition and aligning its trade and investment policies with its successful foreign policy regime.
However, there are plenty of missed opportunities in the budget as well. Raising the competitiveness of India’s industry through drastic deregulation measures, as argued by the Economic Survey, is conspicuously absent. Unlike in the past, this year’s budget pays lip service to digital economy issues and leveraging AI for public goods. There was hardly any mention of improving public service delivery in the education, health, and social sectors. The elaborate and overly complicated nature of the employment and skilling schemes indicates that officials formulating the policies continue to be divorced from the reality of the state’s capacity to implement them.
But overall, and like many of her previous budgets, the Finance Minister has struck a fine balance between macro-level reforms and micro-level concessions. The market may have shrugged off its impact on budget day, but it should rebound once the full effect is understood.
The writer is director and chief executive, ICRIER
