THE CONTEXT: The Union Budget 2024 was presented against global economic volatility and domestic fiscal constraints. Despite global growth resilience, persistent disinflation, high interest rates, and geopolitical uncertainties, India faced balancing fiscal prudence with the need to stimulate private investment and consumption.
THE ISSUES:
- Global Economic Context: As of 2023, the US Federal Reserve’s interest rates are at their highest in over two decades, with the federal funds rate target ranging from 5.25% to 5.50%. The ongoing Russia-Ukraine conflict and tensions in the South China Sea contribute to global instability. The 2024 US presidential election adds further uncertainty, potentially affecting global trade policies and alliances.
- Domestic Economic Context: India’s public debt-to-GDP ratio increased from 85.7% in 2022 to 86.8% in 2023. The fiscal deficit for 2023-24 is targeted at 4.9% of GDP, down from 6.4% in 2021-22. This reduction is crucial for maintaining macroeconomic stability.
- Investment Dynamics: In the past five years, public sector investment has accounted for approximately 30% of total investment in India. Corporate debt-to-equity ratios have improved, with the average ratio for BSE 500 companies dropping from 0.8 in 2020 to 0.6 in 2023. However, private investment remains cautious due to demand uncertainties.
- Impact of China’s Manufacturing Capacity: The US Treasury estimates that China’s planned production capacity for electric vehicles will exceed 70 million units by 2030, while global EV sales are projected to be around 44 million units. China’s Producer Price Index (PPI) has shown a deflationary trend, with a year-on-year decline of 3.6% in June 2023, indicating excess capacity and potential global price pressures.
- Fiscal Prudence and Budgetary Measures: The fiscal deficit target for 2023-24 is 4.9% of GDP, down from 6.9% in 2020-21. This represents a significant consolidation effort. Tax buoyancy is conservatively estimated at 1.0 for 2023-24, compared to 1.4 in 2022-23. Gross tax revenue is projected to grow by 10.8%, aligning with nominal GDP growth of 10.5%.
- Discretionary Expenditure Quality: The ratio of capital to revenue expenditures (excluding interest) has improved from 0.2 in 2020 to 0.4 in 2024, indicating a shift towards more productive spending. The budget increased the long-term capital gains tax on equity investments from 10% to 15% and raised the securities transaction tax on futures and options trading by 25%. The BSE Sensex surged by 20% in 2023, raising concerns about potential market bubbles and financial stability risks.
- Employment and Skilling Initiatives: The budget introduced incentives for employers to hire more workers, focusing on formal sector employment. This includes subsidies for employee training and payroll tax reductions. The budget allocated ₹10,000 crore for new skilling and internship programs, aiming to train 5 million youth over the next five years. Additionally, ₹5,000 crore was earmarked for education loans to support skilling initiatives.
- Structural Reforms and Export Competitiveness: The budget reduced customs duties on over 500 items, including electronics, textiles, and auto parts, to boost export competitiveness. This is expected to reduce import tariffs by an average of 2%. The budget announced plans for land, labor, and capital market reforms in collaboration with states. A comprehensive review of the Income Tax Act is planned to simplify tax compliance and improve the business environment. This includes reducing the corporate tax rate from 30% to 25% for companies with annual turnover up to ₹500 crore.
THE WAY FORWARD:
- Encouraging Private Investment: Develop a robust policy framework that incentivizes private sector investments, particularly in infrastructure and manufacturing. The Production Linked Incentive (PLI) scheme has already attracted investments of over ₹1.28 lakh crore, generating ₹10.8 lakh crore in production and sales and creating 8.5 lakh jobs.
- Boosting Private Consumption: Implement targeted fiscal measures to increase disposable income and stimulate private consumption. Despite strong GDP growth, private consumption grew by only 4% in 2023-24, down from 11% in 2021-22.
- Enhancing Employment Opportunities: Introduce and expand employment-linked incentive schemes to encourage job creation in the formal and informal sectors. The budget announced several Employment-Linked Incentives and new skilling and internship programs to boost formal sector employment. These incentives, coupled with skilling and education loans, are crucial for making labor a more attractive factor of production.
- Strengthening MSMEs: Support MSMEs comprehensively through financing, regulatory changes, and technology support. Initiatives like the Credit Guarantee Scheme for MSMEs and the establishment of eCommerce Export Hubs in PPP mode aim to help MSMEs grow and compete globally.
- Promoting Export Competitiveness: Continue rationalizing tariffs to make Indian exports more competitive. The budget reduced or eliminated customs duties across several sectors, which is expected to enhance export competitiveness. A foundational theorem in trade theory suggests that reducing import tariffs is equivalent to lowering export taxes, thereby boosting exports.
- Infrastructure Development: Encourage public and private infrastructure investments to drive economic growth and improve quality of life. The budget allocated ₹11.11 lakh crore for infrastructure, representing 3.4% of GDP, with provisions for viability gap funding and enabling policies for private sector investment. Significant investment in infrastructure has a strong multiplier effect on the economy and is essential for sustained growth.
THE CONCLUSION:
The 2024 budget adeptly navigated the tightrope of fiscal prudence while laying the groundwork for structural reforms in private consumption and exports. The budget sets a foundation for sustained and inclusive growth in an unpredictable global landscape by addressing immediate economic challenges and initiating long-term reforms.
UPSC PAST YEAR QUESTIONS:
Q.1 Distinguish between capital budget and revenue budget. Explain the components of both these Budgets. 2021
Q.2 The public expenditure management is a challenge to the government of India in the context of budget-making during the post-liberalization period. Clarify it. 2019
Q.3 Comment on the significant changes introduced concerning the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. 2018
Q.4 What is the meaning of the term tax-expenditure? Taking the housing sector as an example, discuss how it influences the government’s budgetary policies. 2013
MAINS PRACTICE QUESTION:
Q.1 Analyze how the budget balances fiscal prudence with the need to stimulate private consumption and exports and evaluate the measures taken to address employment and structural reforms.
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