One of the commendable commitments of the Narendra Modi administration has been to fiscal rectitude, despite its penchant to curate expansive benefits for identifiable groups of the voting public. FM Sitharaman has carried through this commitment in her outlays for fiscal 2024-25.
Aligning with fiscal rectitude principles
Fiscal deficit (FD) the prime metric of fiscal responsibility is to be reduced from the estimated 5.1 percent in the interim budget February 2024 to 4.9 percent despite marginally increasing the outlay for capital expenditure by the Union government and transfer of capital grant to state governments from Rs 14.96 trillion in the interim budget to Rs 15.02 trillion in the final budget.
FM also reiterated her commitment to bring the FD below 4.5 percent of GDP by 2025-26 and thereafter to align the FD with continuous decline to normative levels of India’s bloated debt. By making this ambiguous statement, instead of saying outright by when Union debt would align with the normative FD of 3 percent, the FM seems to be buying flexibility in charting the fiscal stability path ahead.
She can afford to be blasé about returning to normalcy, without roiling bond markets, because India is presently the fastest growing large economy. There are so few good stories out there, that investors both domestic and foreign are loath to be rigidly prescriptive with India. The nominal GDP growth assumption for the budget of 10.5 percent fits neatly into inflation at 4 percent and the minimum level of 6.5 percent real growth, projected by the Economic Survey, released a day earlier- decidedly less bullish than the RBI estimate of 7.2 percent in 2024-25 but in line with the June 2024 IMF estimate.
Rationalizing the “Atma Nirbhar” (self-reliance) dogma
Recognizing that mobile phone manufacture is now a “mature” industry in India, import duty on imported mobiles and components will reduce to 15 percent to make domestic manufacturers more competitive- consumers will benefit.
Similarly, much needed chink holes have been opened in the “Atma Nirbhar” dogma. Rare minerals – imported for use in batteries, nuclear power, renewable power, and defence-space applications will be exempted from import duty or the basic customs duty reduced. This opens the door for value addition in India from their processing and refining. Significantly, the FM also slashed the corporate tax rate for foreign companies from 45 to 35 percent, leaving a 10-percentage point preferential tax rate for domestic corporates. Encouraging foreign companies to import rare minerals duty free, process and refine them in India is a savvy move to incentivize the owners of such global assets, keen to buy, long term, into India’s growth story. In a related move safe harbor protection is envisaged for foreign suppliers of uncut diamonds to market them in India. India imports around 60 percent of the global sale of uncut diamonds by volume.
Ending an irritant for startups
By abolishing “Angel Tax” the FM has widened the catchment area for funding of Indian start-ups. Post its introduction in the waning years of Congress rule in 2012 this was a classic “big state” regulation (reminiscent of pre 1991 liberalization controls) which allowed the government to determine the fair price at which an unlisted Indian start-up could sell its stake to an Indian investor. The intention then might have been to close this route to tax evasion. Notionally, black money can be laundered by creating a zombie start up and selling it to an associate at fabulous valuations with the associate booking fabulous losses subsequently, to set-off her own capital gains elsewhere. Digitization of tax assessment data provides more direct means to assess tax payable, nipping tax evasion in the bud. Case by case review of business investment decisions like the valuation of shares bought or sold, could kill the goose that lays the golden egg by stifling the fast moving and nimble ethos of start-up financing.
More of the same on the expenditure side
On the expenditure side the well-known template of targeted allocations for the poor, youth, women, and farmers continues apace. Across sectors there are nine priority areas. With unemployment becoming a political hot potato and a long-term global concern, the FM applied the mantra of “fiscal incentives”, till now used to boost production, for enhancing employment. It is debatable whether the government can, affordab.ly, tinker with leveling the playing field between labour and capital. The long-term dice are loaded in favor of capital.
A Brahmastra (celestial weapon) for full employment?
To benefit 21 million first-time workers drawing a salary up to Rs 0.1 million (about $1195) a month, the government will give Rs 15,000 in the first year of service to those employed in the formal (large) sector. In the manufacturing sector to benefit 3 million new employees for a period of four years, the government will additionally support provident fund contribution of both the employer and the employee – but details will follow. In addition, to benefit 5 million new employees, across all sectors, over the first two years, the government will reimburse Rs 3000 per month to the employer for contributions to the employee’s provident fund.
Is this a credible and efficient path to full employment? Unlikely, but the jury is out till fuller details are available. It is laudable that the government is trying to incentivise corporates to employ more people in good jobs. The question is whether doling out money indiscriminately for new employment -the productivity of which cannot be measured- is the most efficient way forward beyond statistically increasing the number of new jobs created or more likely, merely subsidize corporates to enhance their profitability and boost stock market valuations via new incentives for jobs they would create in any case.
A pedestrian budget
The budget gets full marks for its continued commitment to fiscal consolidation whilst also recognizing the need to continue with extended welfare outreach to marginalized areas. Where it falls woefully short, is in laying out a coherent, long-term plan to contain inflation – particularly food, a major segment of the consumption basket of the bottom 55 percent, since only cereals and a limited volume of lentils are distributed free to 800 million needy Indians. Also missing is the plan for enhancing productivity in the agriculture sector. Land fragmentation, lack of sustainable irrigation facilities, storage, transportation and sale at undistorted market prices, trap 80 percent of the 80 million farming families, into subsisting on direct benefits transfers.
A shorter version was first published in the Asian Age on July 24, 2024 https://www.asianage.com/opinion/columnists/sanjeev-ahluwalia-fiscally-correct-but-no-new-good-ideas-to-fix-some-age-old-problems-1811918
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