A roadmap to the future

An objective evaluation of the Budget would be to look at how different economic variables have been impacted by the proposals.

To begin with it should be mentioned that the Budget is not a panacea for the economic challenges of the country and is more a statement of accounts of the government projected for FY25 which includes proposals that affect different aspects of the economy to the extent possible.

Therefore there should be no extravagant expectations from this Budget. And also given that it is an interim one, care has been taken to ensure that there are no significant changes. This is a point reiterated by the Finance Minister, so there were no changes on the tax front.

Budget and growth

Does the Budget help in the growth process? Here it is important to examine both the direct and indirect impact. The direct impact can be seen in terms of the capex outlay of the government.

The government has been fairly aggressive here by spending almost 40 per cent of the total incremental outlay on investments. So while there has been a 11.1 per cent increase in capex, the share in total budget has gone up. This is expected to forge strong links with the related sectors such as steel, cement, machinery etc.

The indirect impact would be more on the reduction of logistics cost due to improved road and rail connectivity. But since direct taxes have not been touched, it means investment spurring incentive is not on the plate.

Neutral impact

The fact that the tax structure remains unchanged means that there is a neutral impact on three variables.

First is consumption, which has been the Achilles heel for the last few years starting from the lockdown phase. Typically tax cuts help to spur consumption as real disposable income rises. This impact is stronger at the lower income levels . These measures may be announced in the main Budget in July.

Next is savings. Since the government came up with the new tax system which scrapped tax-deductibles but offered lower slab rates, the focus is on reducing tax savings benefits.

Last year, the Budget withdrew the long-term capital gains benefit on debt mutual funds. So Budgets can no longer be seen as a means to increase the savings habit in the country.

Savings will have to now be looked at as income earning instruments that get taxed in the hands of the individual. This has to be accepted as the government is trying to move everyone to the new scheme.

Inflation effect

The last is inflation which can be influenced by the indirect tax structures. The GST is anyway outside the ambit of the Budget.

But the government has maintained the revenue target on excise duty for FY25 which means that there are no plans to lower the duty on petrol and diesel which will keep prices at the retail end unchanged.

While this is not inflationary, it will definitely not help to bring prices down. Hence it can be said that the Budget is quite neutral on inflation which will be driven by market forces entirely.

Is there a greater focus on improving the lives of the poor? The government has focussed on employment, housing, cash transfers for farmers and free food to the poor in the last four Budgets.

This thrust continues for FY25 too which is a good sign. The MGNREGA outlay has been kept on par with the revised figure for FY24 which was ₹86,000 crore which came in higher than the budgeted amount of ₹60,000 crore. This is a reflection of stress in the rural economy which can be addressed through this employment scheme.

The schemes for cash transfers and housing for the rural economy should continue to provide support to the farming community. This fits in with the overall ideology of the government which was spelt out in detail by the Finance Minister in her speech as this will be guiding spirit in future budgets too.

The issue of subsidies is interesting here. There has been a reduction in both fertilizers and food subsidy. The first assumes that crude oil price will remain within range of $80/barrel. Any spike in the price will push up the cost and hence subsidy.

Here the Budget has taken a conservative view of the global energy economy. The subsidy on food subsidy is down by around ₹10,000 crore. This will mean that the government has to go slow on the MSPs which are announced every year. Food subsidy was expected to increase because a decline in 2023 kharif output would necessitate stronger support through this scheme.

These two numbers need to be watched and it is quite possible that there could be change in the main Budget depending on the evolving environment.

Is there any clear direction provided on disinvestment? This has always been the loose corner of Budgets in India. While all other revenue accounts are predictable as they are related to some aspect of the economy, in case of disinvestment, one can never be sure.

Last year the government targeted ₹61,000 crore but will end up with ₹30,000 crore. For FY25 the Budget is targetting ₹50,000 crore. This may be ambitious given that work will most likely start after the main Budget is announced.

Also the government has to take some hard calls on companies where it would like to exit either partly or fully.

The interim Budget hence shows the roadmap for future while keeping in mind both fiscal and electoral prudence.

Most of the expenditures outlined have been kept to the last year’s level or increased by the same rate as the total outlay of the Budget thus keeping the wheels running with higher expenditure on capex where multiplier effects are higher.

In a true sense it is an interim Budget.

The writer is Chief Economist, Bank of Baroda, Views expressed are personal

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