FM Nirmala Sitharaman's Balancing Act Ticks The Right Boxes; Taste Of The Pudding Is In The Eating

Introduction of employment-linked incentives for job creators, better credit facilitation for small businesses (MSMEs), customs duty cuts and exemptions for select imports, marginal tax relief for the salaried class, higher allocation for urban housing and a hike in taxes on long-term and short term capital gains were some of the highlights of the budget.

The finance minister offered mostly a nuts-and-bolts response to challenges facing the economy and refrained from making any big-ticket announcement.

The biggest takeaway of Union Budget 2024-25 is that the finance minister has been able to keep the fiscal deficit well under check even as she set aside large sums of money to meet the demands of key allies in the National Democratic Alliance – the Telugu Desam Party of Andhra Pradesh CM Chandrababu Naidu and Janata Dal (U) of Bihar CM Nitish Kumar. 

Keeping Allies Happy

Sitharaman has proposed to spend Rs 48.21 lakh crore in FY 2024-25, which is almost Rs 54,000 crore higher than what she had planned in the Interim Budget presented in February, ahead of the Lok Sabha elections.

Much of this increase has under three heads – higher transfer to states (read Bihar and Andhra Pradesh), more money for urban development, and increased allocations for cess-funded projects in roads and highway, education and agricultural infrastructure.

Sops for Bihar included developing an industrial node at Gaya, investment of Rs 26,500 crore in expressways, roads and bridges, expediting aid from multilateral agencies for capital projects and an allocation of Rs 11,500 crore for mitigating impact of floods. The budget also pledged to support development of Nalanda and revival of Nalanda University.

For Andhra Pradesh, the finance minister has promised that Rs 15,000 crore would be arranged this fiscal year via multilateral aid agencies to develop the state’s new capital, Amaravati. The budget also committed to financing and early competitions of the Polavaram Irrigation Project, which is the lifeline of the state’s farmers.

Additional budgetary allocations for essential infrastructure such as water, power, railways and roads for two industrial corridors – one connecting the tech hubs of Hyderabad and Bengaluru and the other linking the port cities of Vishakhapatnam and Chennai – will be made to fulfill the commitments made under the AP Reorganisation Act, Sitharaman said.

For a more detailed account of what the two states have got, click here.

The support of Telugu Desam Party and JD (U), which together have 28 MPs in Lok Sabha, are critical to the survival of the government of Prime Minister Narendra Modi, whose Bharatiya Janata Party fell short of securing a majority in the elections. The BJP has 240 seats in Lok Sabha and depends on the support of allies who together have 51 MPs in the 543-member house.

Conceding to the demands of TDP and JD(U) has meant the finance minister has had to provide Rs 322,787 crore compared to Rs 286,787 crore that she had provided in the Interim Budget. And this is not the only route additional funds would be moving to these states. Some of the money will come from cess funds.

Allocations for cess-funded projects, which also include new initiatives in education and agricultural research, are projected at Rs 144,477 crore, significantly higher than the provision of Rs 123,136 crore in the Interim budget.

The other big hike is in the allocation for urban development, primarily on account of PM Awas Yojana. Against a provision of Rs 77,524 crore, the FM has now proposed Rs 82,577 crore to be spent on urban development.

Balancing The Numbers       

While the above actions have pushed up budget spending, Sitharam has had some cushioning from buoyant tax collections and the healthy cash flow that one has seen from the start of the fiscal year. 

As a result, interest payments this year will be lower than the Interim Budget numbers – Rs 1,162,940 crore vs Rs 1,190,440 crore.

On the revenue side, while tax collection numbers are marginally lower, mostly on account of a slew of customs duty exemptions and some marginal relief announced for the salaried class. Sitharaman raised the standard deduction limit from Rs 50,000 to Rs 75,000 and slightly rejigged the tax slabs under the new tax regime, which she said could save up to Rs 17,500 annually for an individual taxpayer.

The finance minister also signaled the government’s intent to revive share sale in state-run firms as she raised the disinvestment target to Rs 50,000 crore from Rs 30,000 crore projected in the Interim Budget.   

RBI Dividend Payment Comes To Rescue

But the biggest boost to revenue has come from dividend payment from the Reserve Bank of India and public sector undertakings, which have more than doubled from what was projected in the Interim Budget. In May, RBI alone transferred Rs 2.11 lakh crore to the exchequer against an expectation of about Rs 1 lakh crore.  

Consequently, non-tax revenue figures for FY 2024-25 stand significantly revised at Rs 545,701 crore, compared to the projection of Rs 399,701 crore in the Interim budget. Which is how, the finance minister is able to bring down the fiscal deficit estimate to Rs 1,613,312 crore from Rs 1,685,494 crore in the Interim budget.

As a percentage of GDP, the fiscal deficit is now pegged at 4.9 per cent, down from 5.1 per cent in the Interim Budget and 5.6 per cent in the previous fiscal year. The FM said the government would stay the course of fiscal consolidation and bring down the deficit to 4.5 per cent of GDP next year. 

This bodes well for the broader economy as it will help the RBI to fasttrack its plans to reduce interest rates that, in turn, will spur investment and growth.

Also, India appears to be on the cusp of a sovereign rating upgrade that has eluded policy makers for decades. If Sitharaman’s projection comes true, the prospects of a rating upgrade would turn into a reality

Tackling Joblessness

While India’s economy has been the fastest growing among the world’s major economies and its growth remains intact, the lack of enough jobs getting generated has been the government’s achilles heel.

The BJP leadership has also been under pressure from within to do more to address rural distress, lack of jobs and high inflation, which are seen as reasons behind the not-so-impressive performance of the party in the Lok Sabha elections.

It was not surprising, therefore, that Sitharaman front-loaded her budget speech on Tuesday with new initiatives to tackle unemployment and the growing resentment among the youth.

She announced three schemes involving employment-linked incentives for employers. Under the first scheme, the government will bear one-month’s wage for anyone entering the formal job market for the first time. 

The second scheme is aimed at creating jobs in manufacturing, wherein the government would directly provide for EPFO contribution by both the employee and the employer in the first 4 years of employment. 

Third, for all additional employment within a monthly salary of Rs 1 lakh, the government would reimburse employers up to Rs 3,000 per month per employee for two years, via EPFO contributions.

The proposed employment linked incentives are a welcome change from the government’s earlier obsession with productivity-linked incentives, which mostly benefited large companies and hardly helped in creating jobs. Tuesday’s initiative could specifically help the MSME sector, which employs about 1.25 crore people, provided it is implemented in letter and spirit.

That said, a more durable solution to growing joblessness would require well thought-out supply side interventions and major structural reforms. Some would argue that, perhaps, is beyond the scope of the budget. 

MSMEs in Focus

The finance minister announced a host of new measures including collateral free term loans for purchase of machinery and equipment, in-house credit assessment for MSMEs by public sector banks along with setting up of a new credit assessment model based on the scoring of their digital footprints. 

She also increased the limit on MUDRA loans from Rs 10 lakh to Rs 20 lakh for entrepreneurs who availed and successfully repaid previous debts and allowed to unlock their working capital by converting their trade receivables into cash among others.

That apart, SIDBI will open new branches to expand its reach to serve all major MSME clusters within three years, and provide direct credit to them, the finance minister announced. 

While that may sound encouraging, the reality is that successful implementation of schemes intended to help MSMEs has been a challenge

Despite the government and Reserve Bank of India focusing on improving credit flow to the MSME sector at low cost, the sector is yet to shrug off the impact of the Covid-19 pandemic. The geopolitical uncertainties have multiplied their problems.

In the last couple of years, many MSMEs facing acute cash shortages have been forced to wind up. Though bank advances to MSMEs have grown, the overall credit gap has expanded as well to about Rs 30 lakh crore, indicating severe funding strains in the sector.

According to data portal Statista, the contribution of MSME-related exports as a share of total exports from India in the financial year 2023, stood at around 42.6 per cent. The share was around 49 per cent during the financial years 2020 and 2021.

Several schemes such as PM Vishwakarma Scheme, Prime Minister’s Employment Generation Programme and Emergency Credit Line Guarantee Scheme, among others are already in place, without having made much visible impact.

It remains to be seen how Tuesday’s announcements pan out.