THE CONTEXT: The Budget has detailed its objectives and action plans to achieve them. While the broad objectives are clear, the roadmaps to achieve them are unclear, as spelled out in the Finance Minister’s speech. The budget’s impact depends upon how effectively the projects are implemented.
THE ISSUES:
- Limited changes between the Interim and Final Budget: There are marginal differences on the expenditure side, with the revenue being more impacted due to increased RBI dividends. The gross tax revenue estimate is Rs 38.4 lakh crore, assuming 1.03 tax buoyancy and 10.5% nominal GDP growth. Compared to the interim budget, there will be an additional Rs 27,428 crore tax devolution to states. The total expenditure has increased by Rs 54,744 crore, with all of it allocated to revenue expenditures.
- Fiscal consolidation progress and targets: The fiscal deficit has been successfully reduced to 4.9% of the GDP compared to the 5.1% recorded in the Interim Budget. It is important to strive toward reaching the target of 3% of the GDP as soon as possible. Household financial savings have hit a historic low of 5.3% of the GDP in 2022-23, indicating the need to decrease the government’s reliance on financial savings to foster private investment growth.
- Tax reforms and rationalization: The government has announced a comprehensive review of the Income Tax Act 1961, which will be completed within six months. Capital gains tax rates have been increased and rationalized as part of the review. Plans are also underway to streamline personal income tax into a single “new” model. The removal of angel tax is being considered to facilitate the flow of venture capital to startups.
- Capital expenditure and state loans: The latest budget announcement noted no change in the budgeted capital expenditure, which is set at Rs 11.11 lakh crore. However, nearly Rs 21,000 crore has been reduced in non-defense capital outlay. Additionally, providing Rs 1.5 lakh crore interest-free loans to states for capital spending is significant. It’s worth noting that there has been limited utilization of state loans in previous years, with some less developed states showing higher usage.
- Employment schemes and challenges: The government has introduced new “Employment-Linked Incentives” with three main components. There are concerns about the focus on creating long-term, formal employment instead of temporary jobs. Improving the employment elasticity of growth in non-farm sectors is crucial. It’s important to consider the impact of new technologies, such as AI, on job creation.
- Need for performance budgeting and quantifiable outcomes: Many expenditure schemes are focused on future years, but progress on past initiatives, such as achieving self-sufficiency in oilseeds, is not assessed. It is crucial to ensure that actual expenditures match planned expenditures. Additionally, it is critical to quantify schemes’ success and impact on economic growth and employment.
THE WAY FORWARD:
- Enhancing Fiscal Discipline and Consolidation: Continue the path of fiscal consolidation by effectively managing expenditures and increasing revenue collection. Increase tax compliance and broaden the tax base through digital taxation and GST reforms.
- Expenditure Management: Focus on reducing non-essential expenditures and improving the efficiency of public spending. For instance, the budget has allocated significant funds for capital expenditure, which is expected to have a high multiplier effect on economic growth. Fiscal prudence is crucial for maintaining macroeconomic stability and sustainable development.
- Boosting Private Investment: The budget aims to create a conducive environment for private sector investment, reduce the government’s draw on financial savings, and provide incentives for private investments. It includes providing interest-free loans to states for capital projects. However, the utilization of these funds has been limited in the past, and efforts should be made to improve their uptake.
- Improving Employment and Skill Development: Implement targeted employment and skill development programs to create stable, long-term employment opportunities. Addressing unemployment through targeted initiatives is crucial for economic growth. The budget’s focus on employment generation and skill development is a step towards achieving this goal.
- Enhancing Revenue Expenditure Efficiency: Improve the efficiency and effectiveness of public spending to ensure that increased revenue expenditure translates into tangible outcomes. Implement performance budgeting to ensure that actual expenditures match planned expenditures. This involves setting clear targets and regularly monitoring progress.
- Promoting Agricultural and Rural Development: Implement comprehensive agricultural reforms and invest in rural infrastructure to boost farmer incomes and development. Enhance market reforms through initiatives like e-NAM, improve agricultural infrastructure, and expand irrigation facilities. The budget focuses on enhancing farmer incomes through initiatives like PM-KISAN and promoting agri-tech innovations. To support rural development and improve living standards, develop rural roads, electrification, and connectivity under schemes like PM GatiShakti.
THE CONCLUSION:
The final Budget for 2024-25 shows only marginal differences from the Interim Budget in terms of expenditures but significant changes in revenue due to increased RBI dividends. The fiscal consolidation and strategic resource allocation focus underscores the government’s commitment to sustainable growth. However, the success of these initiatives will hinge on effective implementation and continued fiscal discipline.
UPSC PAST YEAR QUESTIONS:
Q.1 Distinguish between capital budget and revenue budget. Explain the components of both these Budgets. 2021
Q.2 Comment on the important changes introduced regarding the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. 2018
Q.3 The savings rate is the most effective Among several factors for India’s potential growth. Do you agree? What are the other factors available for growth potential? 2017
MAINS PRACTICE QUESTION:
Q.1 The Budget has emphasized fiscal consolidation to reduce the fiscal deficit. Discuss the importance of fiscal consolidation in declining household financial savings and the need for private investment.
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