None of the signature economic policies of the last ten years of the BJP government were first announced in the respective Budgets. GST, Insolvency and Bankruptcy Code, farm laws, bank mergers, sale of Air India, labour code, or even demonetisation were not heard of first in the budget.

The budgets got around to handling their impact.

If this NDA government wishes to veer towards populism, whatever that means, or make some announcements to catch the imagination of the public, the Union Budget may not be the chosen platform. 

Accounting Statements or Policy Intentions?

So what have the successive budgets done? They have been essentially accounting statements of the government for the year with the consequent emphasis on the results of those statements. Those results were the emphasis on fiscal deficit, corresponding borrowing numbers and tax adjustments mostly for customs.

Former finance minister Arun Jaitley signalled the government intentions by raising those sharply in the Budget for 2017-18 and current finance minister Nirmala Sitharaman has made some soft pedal changes to lower those in 2023-24. The one big change rung in by the Budget each year is the announcement for capital expenditure. Again, remember, budgets since yore had been mentioning capex. This government has brought those numbers upfront and justly so, taken credit for the vastly increased outlays. 

Come to think of it, there is no other government document or occasion when the capex numbers could be announced. So, again, going by the conservative streak displayed by Prime Minister Modi, this number is flagged prominently in the budget. 

In this context what is the major battle for this government. The key question for finance minister Nirmala Sitharaman are two. Can she further reduce government expenditure? While purists may advocate such a step especially to improve on the fiscal deficit number of 5.1 percent penciled in the interim budget, her room to do so is very limited. An important constraint is the size of the capex she will wish to show now.

Tough Choice Between Revenue or Capital Spending 

The Interim Budget had proposed a capex increase to 3.4 percent of GDP, with revenue expenditure sliding to 11.1 percent of GDP. Any ambition to raise the number to say, 3.5 percent of GDP will mean a rise of over 20 per cent over what was spent in 2023-24. But that would mean revenue expenditure has to be shaved further down to something like 11 per cent of the GDP.

These are difficult tasks. Because, remember the aggregate subsidy bill is already very low at 1.5 percent of the GDP. This is a huge compression from the level of 2.13 percent just two years ago in 2022-23. And within this, all the demands for special status plus others as sops to raise consumption at the lower end of the income deciles have to be adjusted by her. 

So what are her options? She has been given a huge support by the RBI through the transfer of extra dividends, about 0.4 per cent of the GDP. That is a big cushion to make room for some extra expenditure. But as we said, given the conservative streak Modi has shown in every budget, it is unlikely he will encourage using all of the largesse to hand out goodies. Inflation risks are already rising in the economy. 

More Taxation on Cards?

Instead, the finance minister will most likely push for higher taxes. This is the first budget after the general elections and so the best time to raise revenues. The net tax revenues of the Centre have been rising slowly in recent years which is good news. It has grown from 7.2 per cent of GDP in 2020-21 to 7.88 per cent in 2023-24. Of this the share of direct taxes has consistently outpaced that of indirect taxes, since 2021-22.  

The finance minister can make the most of these trends. She can impose additional taxes on investments in the stock market while offering carrots like higher thresholds for income tax slabs. It will be good optics if the GST rates are also softened soon because those rates affect the poor disproportionately. This class remains silent while the income tax relief will only benefit the vocal middle class. There has been some canvassing to offer tax relief on savings deposits in banks but this will be a hark back to the old taxation regime and so unlikely to materialise.

These measures will help the economy more than any amount of freebies. Startups benefit from a stable tax regime, while a lower GST offers more income benefit to the poor, than sops offered through the mass of centrally sponsored schemes.

Stapled with a low fiscal deficit, and consequently low interest rates, this is then an offer of higher employment, low inflation, and faster growth from the Budget. I would settle for it. 

Subhomoy Bhattacharjee is an economist and Consulting Editor at Business Standard