he budget that comes after a new government is sworn in would normally not elicit much discussion as it would be dealing with just about eight months when much of the normal announcements made during the Interim Budget would have to be implemented. This time will be different as the Budget is critical from the point of view of all stakeholders for the ‘messaging that is done’. It is the concept of a coalition government which evokes conjecture.
Global credit rating agencies would be watching out for what the Budget holds for the economy and the future when it comes to taking a status check of credit. The industry is watching out for how government expenditure will work out for FY25, whereas individuals will be looking for some tax relief, given the relentlessly high inflation rates in the last 3-4 years. Hence, the Budget will be a landmark one in terms of providing direction on all counts. Higher capex would be positive for industries like steel and cement, while a focus on housing or PLI will impact the concerned sectors discernibly.
What then should one look out for in this Budget? From the perspective of an economist, the budgetary numbers are important as they encapsulate government’s priorities. The continuity in government gives assurance that the starting point will be fiscal prudence and the walk will be along the Fiscal Responsibility and Budget Management path. Hence, the fiscal deficit ratio targeted in the Interim Budget at 5.1% would hold, although with a downward bias. The fact that the transfer of RBI surplus is about Rs 1 lakh crore higher than what was budgeted from the banking sector provides a lot of room for flexibility in managing other aspects of the Budget.
The other area of interest would be the quality of expenditure, where the government has shown commitment to increasing capex. Consensus across stakeholders in the government is likely and no compromise is expected here even though there may not be any major increase in the number provided in the Interim Budget of Rs 11.11 lakh crore. It was noted even during the time of presentation of the Interim Budget that even as the base of capex increases it is not possible to keep growing the outlay by 20-30% every year.
Markets will also be keen to know about the disinvestment plans as it was expected that post-election the momentum will pick up both from disinvestment and asset sale. It is likely that plans are in place and the Budget would provide further direction.
On the revenue expenditure side, the outlays on subsidies and other social welfare schemes will merit attention. The Interim Budget had more or less capped the outlays at levels closer to either the budgeted or revised numbers for FY24. The Budget allocation would be significant as any increase would be indicative of further possible enhancements as part of adherence to the promises made in manifestoes. Global agencies have also flagged this and would be tracking it.
From the point of view of industry, there is no expectation of concessions in corporate taxation although any kind of ‘deductible’ investment allowance would be an incentive to revive private investment. This is one area that has been lagging due to low demand. Further, the MSME segment is expected to be incentivised with a PLI-like scheme, where the outlay would be much lower but can cover a wider range of industries. MSMEs have a vital role to play in both industrial growth with a share of about 36% as well as exports (about 40% share), and such an incentive will also fit well with the government’s aspirations of making India more vibrant in terms of being part of global value chains.
At the individual level, it is necessary to increase consumption and savings. Over the years, growth in real consumption has slowed down considerably, which has been due to lower pace of job creation and higher cumulative inflation of almost 30% in the last 5 years. There are two routes here. The first is to fix income-tax slabs with inflation in mind. This can be an annual affair just as is done for dearness allowance adjustments. The other is to take a closer look at the GST system and rationalise the rates for mass-consumption goods. Both of them will help to increase purchasing power.
The declining share of assets in household savings is a concern as funds are being diverted to either equity markets or gold due to higher potential returns. Any drop in savings will, ex post, widen the current account deficit as investment gets financed by foreign funds rather than domestic. A way out is to enhance the savings limit under Section 80C of the Income Tax Act. This would be within the realm of old tax scales. A combination of the new system with wider bands of lower taxes and the old system with more scope to save can improve both consumption and savings.
Hence, it can be said that there is going to be a plethora of expectations from all sections including global agencies and investors. The India growth story has caught up globally, which has been achieved under a strong government. With continuity in the government and a blend of coalition politics, the language of the Budget and the actions in terms of dealing with different stakeholders become even more important. This Budget will be a curtain-raiser for the full show of what is to come in the next five years. Investors would form opinions that can influence their medium-term decisions based on the message conveyed in the July Budget.
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