Opinion
Will the budget help India escape a middle-income trap?
Summary
- Apart from new hiring incentives, an optical tilt in outlays towards ally-run states and slight tax relief, it doesn’t show much of a poll impact. With the state set to carry on as the economy's big spender, it’s mostly policy as usual. Is this wise?
The first budget of India’s new government was broadly under watch for two things. First, the degree to which it would be inflected by an election outcome that exposed a drop in the ruling party’s appeal, and second, the buffer it would create against the potential pitfall of a middle-income trap on our way to ‘developed’ status.
Both converge to one question: How to rebalance policy for the economy to emerge evenly and not have the lives of citizens diverge, with a vast chunk of our socio-economic pyramid falling further behind the rich. Admittedly, this puzzle is not easy to crack, nor wholly within the scope of India’s fiscal plan for 2024-25.
Yet, the base conditions have long been clear: rapid GDP growth amid stable inflation. Usually, a tight deficit favours both, but our pandemic recovery was led by government spending and its pullback has been slowed by private expenditure failing to fill in.
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With this year’s deficit target set at 4.9% of GDP, finance minister Nirmala Sitharaman signalled no shift in that approach, though a bigger forecast of receipts allowed her to snip the interim budget’s 5.1% figure.
Till the private sector steps up, we can probably expect the state to play its big-spender role. The outlay for infrastructure was held steady at ₹11.1 trillion, the same as its interim estimate.
This is a slightly smaller share of the budget’s total expenditure pie, which was enlarged to ₹48.2 trillion, but it’s still bulky.
What about election impact? An allocation skew in favour of Bihar and Andhra Pradesh, the support of whose leaders is critical to the government, was widely expected. But since it’s mostly optical, it isn’t a fiscal blow.
Beyond that, a job-creation thrust is evident, this time by means of an employment-linked incentive scheme inspired by the government’s props for factory production, apart from some support for internships.
Outlays on welfare schemes, however, saw no notable change from their interim levels. As for tax relief for taxpayers under the new income-tax regime, the jury is out on its efficacy as a stimulus for consumption in the context of weak aggregate demand.
But then again, tax policy alone can’t be expected to spur consumer markets and stir ‘animal spirits’ for domestic investment in a country where taxpayers are a minority. The big taxation rethink was on capital gains, which has been simplified but stiffened, to the dismay of asset markets.
That bugbear of startups, the ‘angel tax,’ will be axed—thankfully. Import tariffs have been rejigged to relieve a few sectors and redress overtaxed inputs, but these are selective tweaks. We await broader action on a jagged maze of duties that make it hard for local factories to fit snugly into global supply chains.
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None of it reveals any revision of economic policy. The budget bears a distinct supply-side orientation, like past infra-focused budgets, with an emphasis on productive capacity. A bright spot in the FM’s speech was her promise of factor-market reforms as part of a revised policy framework aimed at efficiency.
From the viewpoint of near-term GDP growth, all this is fine, even welcome. Why fix what isn’t broken? In any case, nobody expected a shift. Yet, outlays on health and education remain too small to justify lofty aspirations of development and India’s welfare apparatus—with free food as its base—looks set to stay rudimentary.
Even so, if the budget helps spread the gains of growth just a little better, it would aid the country’s larger cause. To stay on course for a Viksit Bharat, our economy needs to emerge less unevenly.
