Sitharaman delivers a low-decibel, pitch-perfect interim budget

This made the task for finance minister Nirmala Sitharaman’s sixth budget rather simple: to ensure that the narrative and the political mood in the country isn’t disturbed.

She has done just that, and more.

Sitharaman left all existing direct and indirect tax rates untouched, and devoted most of her speech to a recap of the schemes the Narendra Modi government announced over the past 10 years.

She reminded us that when the Modi government first came to office, citizens didn’t have to pay tax on incomes of up to ₹2.5 lakh a year, but that threshold is now ₹7 lakh. She gave us a heads-up for the full budget post-election in July, which, she said, will have a vision for making India a developed economy.

The interim budget presented on Thursday was low decibel and shorn of big-ticket pre-election sweeteners of the kind announced in 2019. But that wasn’t due to the convention that requires a vote on account to merely provide the expenditure needed to keep the government functioning until a full budget can presented by a new government after the Lok Sabha election.

The main significance of interim budgets is actually for the insights they provide into the political economy; the fiscal arithmetic in any case gets revised when the full budget is presented after the election.

The interim budget for 2019 was a response to the losses the BJP had suffered in 2018 in states assembly polls. Plus, the states of Telangana and Odisha had rolled out cash payments for farmers amid a narrative of rural distress, which put political pressure on the centre to match up or risk losing farmer votes.

Sitharaman’s predecessor Piyush Goyal made annual incomes of up to ₹5 lakh tax-free, raising the income tax threshold to roughly three times the per capita income and letting go of 13 million taxpayers. That shrunk the tax net so much that of the total number of individuals who filed returns that year, 63% paid no income tax at all. In that interim budget, Goyal also announced cash payments of ₹6,000 a year per farmer family under the flagship PM Kisan scheme.

The brief for Sitharaman in 2024 was very different. Prime minister Narendra Modi, taking no chances this time, had already announced free food grains for more than 800 million Indians for the next five years during his campaign in 2023 ahead of the assembly polls in five states, rather than waiting for the interim budget. Generous hikes in minimum support prices, at which government buys wheat from farmers, were also promised.

As with politics, so too for economic policy. That the government’s policy decisions aren’t bound by the convention or predictability of budget presentations was clear when the government cut import duty on mobile phone components barely hours ahead of Thursday’s presentation of the interim budget.

These cuts came in as response to years of criticism of its policy of high tariffs that economists say are eroding global competitiveness of India-made mobile phones, blunting efforts under the ‘Make in India’ initiative.

But the interim budget was no washout. Sitharaman had her day in the sun as she reiterated that the fiscal deficit will be reduced to 4.5% of GDP by FY26, the commitment she first made in her budget speech for FY22 after the pandemic threw awry all her estimates of revenue collections and spending.

This fiscal consolidation, she promised again, will not compromise the allocations for capital expenditure, the workhorse of the government’s growth strategy.

For FY25, she increased the budget outlay on capital expenditure by 11.1% to ₹11,11,111 crore. The avoiding of round figures, just as is done in some parts of the country when money is gifted, is a signature Nirmala Sitharaman touch, much like carrying budget documents in red clutches, retiring briefcases her male predecessors used, and reading the budget speech from a tablet rather than paper sheets.

For FY24, she committed to keep the fiscal deficit (roughly what the government must borrow to pay for expenditures its revenue won’t cover) at 5.8% of GDP, below the target of 5.9%.

This is higher than in the last years of predecessor governments before elections. The P.V.N. Rao government brought the economy out of the 1991 crisis and reduced the fiscal deficit to 4.91% of GDP by its last year, FY96. Atal Bihari Vajpayee’s government dealt with the Asian crisis and brought the fiscal deficit down to 4.34% of GDP for FY04.

The Manmohan Singh government steered the economy out of the global financial crisis and the ‘Fragile Five’ crisis, but didn’t do as well against ‘policy paralysis’. But it did make sure that the fiscal deficit was reduced to 4.48% of GDP in FY14, before Narendra Modi was elected prime minister.

Sitharaman has chosen to remain committed to increasing capital expenditure to strengthen domestic growth momentum, which is critical for supporting GDP growth in the absence of a revival in private investments. The share of private investments (as measured by the government’s estimates for gross fixed capital formation) in GDP (at current prices) remains less than 30%.

The finance minister provided continuity in policy also for the profit-linked tax holiday startups get. The sop was available to startups incorporated before 31 March 2024. The interim budget has extended this cut-off date to 31 March 2025.

Expectations were that she would extend the concessional tax regime of 15% for manufacturing facilities, which is set to end on 31 March. The interim budget hasn’t done that, but who knows what the government may do later.

Finance ministers in Modi administrations have shown less preference for poetry than seen in budget speeches traditionally. They do make it a point to come up with zany acronyms and abbreviations. Sitharaman gave a twist to GDP, short for gross domestic product: Governance, Development and Performance.

Probably an early sign that the full budget in July must go for a complete overhaul of the growth strategy: the economy is up against old and new challenges, all of which require policy adjustments.

Big economies of the world want to produce more and more at home so as to depend less and less on imports. This will require global trade, and thereby every country, to adjust. Climate politics and unpredictable new technologies such as AI will disrupt the economy, requiring policy responses.

Plus, rural distress needs an urgent response. The twin strategies of increasing capex and welfare spending of the last few years haven’t yet shown significant results in rural India, which is delaying a sustainable pick-up in consumption spending in the economy, which is essential for sustained high GDP growth and corporate sales.

Research published by ICRIER economists led by Dr. Ashok Gulati shows that in rural India real farm wages growth decelerated 3.3% per annum from 2014-15 to 2018-19. Non-farm wages in the same period decelerated 3% per annum. From 2019-20 to 2023-24, these rates became negative. This becomes even more critical at a time the government estimates the agriculture sector to grow 1.8% in FY24, slower than 4% in FY23.

The brief for the full budget in July is clear as was for the interim one Sitharaman has delivered.