Budget 2024: It’s fiscally sound but a weak foundation for Viksit Bharat

On the fiscal question, despite highly uncertain global conditions, India continues to grow at around 7%. Inflation is moderately elevated. Though above the 4% Reserve Bank of India (RBI) target due to high food prices, it is now under the 6% upper-limit of RBI’s tolerance band. The current account deficit is also comfortable at well below 1% of gross domestic product (GDP). 

The main area of concern is high central government debt at over 58% of GDP. Against this background, there is—as in recent budgets—a huge allocation for capex of over ₹11.1 trillion. At the same time, the fiscal deficit (FD) has been set at 4.9% of GDP, a sharp reduction from 5.6% in 2023-24. This has been possible partly due to buoyant revenue growth of 14.7%, including a huge transfer of RBI’s surplus. 

Also read: The budget’s push for job creation is crucial to our development dreams

But the deficit reduction is also attributable to compression of revenue expenditure, which is budgeted to grow by just over 6%. The central government’s debt-to-GDP ratio is accordingly set to decline from 58.2 % to 56.8%. 

Finance minister Nirmala Sitharaman has stated that the FD will be brought under 4.5% , the target she had set back in 2021, and that it will continue to be reduced thereafter to ensure a declining debt-to-GDP ratio. Given the FM’s track record, this is a credible commitment.

On the budget’s response to the May election outcome, two points have become quite clear. First, the government is now crucially dependent on the support of the Janata Dal-United and Telugu Desam Party for staying in power and both have claimed their pound of flesh. Second, voters are frustrated by the lack of good jobs to earn decent livelihoods and the government needs to focus on productive employment generation.

Regarding the first point, the budget has given generous packages to both Bihar and Andhra Pradesh. These are presented as part of a special focus on eastern states: Bihar, Jharkhand, West Bengal, Odisha and Andhra Pradesh. 

However, it is only Bihar and Andhra Pradesh which have actually got jumbo allocations of budgetary resources. That other opposition states are miffed and are referring to the budget as a “kursi bachao" (chair saving) budget is understandable.

Also read: The budget’s holistic approach promises inclusive economic growth

With regard to employment and livelihoods, a whole slew of financial incentive schemes have been announced to incentivize the entry of young workers as new recruits or apprentices in large firms and for skilling programmes entailing close involvement of industry. Several schemes have also been announced for supporting the employment-intensive micro, small and medium enterprises (MSME) sector. 

There is a shift in focus away from the traditional social-safety net, such as the food subsidy and MNREGA, to ramping up productive employment in both the formal and informal sectors. Whether or not this approach works will depend on whether the incentives are attractive enough for private companies to adopt and implement these schemes.

Finally, what does the budget offer towards the goal of Viksit Bharat—of India becoming a developed country by 2047? It is important to recognize in this context that the emerging global economy will be shaped by two fundamental technological changes, namely the energy transition and an artificial intelligence (AI)-driven economic transformation. 

There is intense ongoing global competition, especially between the US and China, over controlling this complex technological transformation. How can India position itself in this emerging global economy and does the budget move the needle in that direction?

Three main points need to be made. First, the FM has indicated that an economic policy framework will be prepared for the next generation of reforms. She has listed 17 items as possible components. 

These mostly relate to factor markets, and while important in themselves, they do not even begin to address the kind of emerging global economic challenges cited above. We need some out- of-the-box thinking for the next generation of reforms.

Second, in taxation, nearly 35 years have passed since the last big wave of tax reforms, barring the introduction of GST. It is time to consider a comprehensive reform of the Indian tax system as part of the next generation of reforms. 

While several ad hoc direct tax measures have been introduced, the FM has announced that there will be a comprehensive review of the 1961 Income Tax Act to revise and simplify it. The sooner this is done, the better. A draft simplified direct tax code was unfortunately put aside a few years ago. Hopefully, this can now be revived expeditiously.

A similar simple, comprehensive code can be considered for customs duties, which continue to be changed in an ad hoc manner. Finally, the FM can also work through the Goods and Services Tax (GST) Council, which she chairs, to also simplify the structure of GST.

Also read: Budget 2024 presents a detailed, comprehensive road map for Viksit Bharat

Third, the expenditure budget lists several schemes that address the issue of the country’s energy transition. These initiatives are welcome, though they need to be significantly scaled up and accelerated as part of next-generation reforms. Unfortunately, even such limited initiatives are missing with regard to preparing for an AI-driven global economy.