10 reasons we liked the union budget 2024-25

26 Jul 2024 , 09:22 AM

The Union Budget (full) for 2024-25 was supposed to be a non-event. After all, the government had given a fairly robust framework in the interim budget. The general belief was that the government would use the full budget to just reiterate its commitment to reforms. That is what investors were looking at. However, this was the budget that set the ball rolling on many long-standing shifts required for the Indian economy. Here is a quick dekko at the ten reasons why we liked this budget compared to previous budgets.

• IT WAS A BUDGET THAT REDEFINED THE INDIAN CASTE SYSTEM

Let me clarify that when you talk about the caste system in India, it has at times (not so positive) connotations. However, in the full budget 2024-25, the government has gone ahead and defined its four priority areas as the only castes that matter in modern India. The provisions of the budget have been targeted at these four castes, which (according to the government) need the maximum attention in terms of reforms and allocations. The first is the Annadaata or the farmer. Anyone who has seen the chaos that high farm prices have caused to the Indian economy would appreciate that.

The second caste is the Garib (poor). The budget has made it amply clear that any reforms program to be successful must carry the people at the bottom of the pyramid along with them. The third such caste is the youth (call it Gen-X or Gen-Z). If India has to be catapulted to a higher level of growth, the thrust has to come from the demographic dividends of youth. That is the big bet that the Indian economy has to make. The fourth and last caste focus are the women. For the first time, the budget has some provisions that were brought in with the women in mind. The budget does mark a big step in gender budgeting.

• A CAPITALIST BUDGET WITH A SOCIALIST TOUCH

At a more sardonic level, analysts have called it “Full Marks to Marx.” However, that was always the need of the hour. The only way the per capita income could go above that $2,500 barrier is if the budgets started thinking seriously about pushing the people above the line with clear cut reforms in place. That is why this budget has had a strong socialist touch. It is not just about coalition pressures, but about the need of the hour. This includes a massive plan to generate jobs for the youth, a big investment in skilling the youth through public private partnerships, a big focus to revive MSMEs (hit the most by GST and demonetization), as well as measures that would put more money in the hands of the middle class to counter the rising menace of inflation.

• IN FARMS WE TRUST, IN SCIENCE WE TRUST ABSOLUTELY

The budget is the first budget that has laid substantial emphasis on the role of science and research in the field of agriculture. There is only so much that can be achieved through irrigations projects and better MSP. The next big step is to modernize agriculture. The budget 2024-25 has focused on transforming agricultural research, ensuring self-sufficiency in oil seeds like mustard, groundnut, sesame, soybean, and sunflower. The budget also focused on all-round development of the cooperative model of farming in India. The budget has also laid out plans to encourage start-ups to play a pivotal role in the vegetable supply chain with their technology driven solutions. The budget, above all, has also tried to broaden the farm portfolio through new high yielding and climate resistant crop varieties. These would be assisted with a strong digital public infrastructure.

• FISCAL PRUDENCE; FIRST AND FOREMOST

Ahead of the full budget, there were concerns that due to higher allocations to agriculture and food subsidies, the government may go slow on fiscal prudence. However, the government has belied these fears. For the full year FY25, the fiscal deficit target has been further lowered to 4.9%. Just to recap, the original fiscal deficit target for FY24 was 5.9%, which was later reduced to 5.8% in the interim budget. However, the actual fiscal deficit came in much lower at just 5.6%. For FY25, the government had already set an aggressive target of fiscal deficit at 5.1% of the GDP in the interim budget. In the full budget, this fiscal deficit target has been further cut to 4.9% of GDP, largely on account of the robust ₹2.11 Trillion dividend payout by the RBI to the government. This is likely to be reduced to 4.5% or lower in FY26. Clearly, despite the spending pressure, the government is not compromising on fiscal prudence; and that is a good thing!

• DISINVESTMENTS ARE OFFICIALLY ON THE BACKBURNER

That may not have been officially announced, but the message is clear. In FY24, the government set a conservative disinvestment target of ₹50,000 Crore, but achieved just ₹31,000 Crore. This year, for FY25, the target stays at ₹50,000 Crore, but that looks more like a formality. What the government learnt in the last 5 years is that it is a lot more profitable to give these PSUs a free hand and make them profitable on a consistent basis. The value creation would be substantial. Anybody who has doubts about this approach should just see the rally in PSU banks, PSU fertilizer stocks and PSU defence stocks. In all these cases, the market cap accretion has been huge with most of these stocks ending up as multi-baggers. That could be the template going ahead. Government will focus more on making the existing PSUs sleeker, more transparent and more profitable. On disinvestment, the focus would be more on selling the land and non-core assets of the company than to sell stakes in these companies. That overcomes the risk of selling PSUs for a song.

• MAKING TAXES LESS INTIMIDATING

Apart from simplifying some of the filing requirements, the Union Budget 2024-25 has also given some much needed relief to the middle class to make taxes less intimidating. For instance, the new tax regime slabs have been tweaked in such a way that tax payers under the new tax regime will save ₹10,000 from the tax slab tweak. In addition, the standard deduction has been raised from ₹50,000 to ₹75,000 per year under the NTR only. Thus, the overall benefit from this tweak and the standard deduction increase will result in tax saving of ₹17,500 for individuals. In addition, the exemption limit for family pensions has also been raised. Overall, it is about putting more money in the pockets of the Indian middle class.

Also, employer contribution to the employee NPS will now be tax-free up to 14% of salary, as against just 10% prior to the budget. At a time when inflation is rising continuously, these tweaks give the much needed relief. One very important change in this budget is that if you are salaried, then the TCS amount can be used to get benefits on TDS deduction. Here is how. Let us say you transferred ₹8 Lakhs abroad for your son’s expenses. The bank will deduct 20% TCS on the amount above ₹7 Lakhs, amounting to ₹20,000. Now you can give these details to the HR department and they will reduce your TDS by the amount of TCS. This is a welcome change and does not result in deducting tax twice on the same income.

• SIMPLIFYING TAXES, ESPECIALLY CAPITAL GAINS

Capital gains taxation was awfully complex with different asset class definitions of long term and short term capital gains as well as different rates of tax for different asset classes. Now there are only two types of asset classes. Equities and listed assets where the cut off is one year and all other assets where the cut-off is two years. The 3 year classification is removed altogether. The standard rate of tax for long term assets in 1- year class has been raised from 10% to 12.5% while STCG tax was hiked from 15% to 20%. This ensures a larger gap between short term rates and long term rates. Interestingly, the higher rates of taxes applicable could make loss farming more attractive for traders and investors.

• PUSHING INVESTORS AWAY FROM SPECULATION

There is a subtle push away from too much of speculation in the futures & options market. This is best exemplified by the surge in the securities transaction tax (STT) on futures and options transaction. For instance, the rate of STT on options trading has been raised 16-fold while the STT on selling futures has also been nearly doubled. The apprehensions about too much retail speculation had been first raised by the SEBI chairperson about 6 months back, and now the budget has acted by raising the STT rates. The higher STT is likely to act as a deterrent against too much of retail speculation in F&O. This is likely to avoid volatility in the markets when there are positive or negative news flows in the market. The idea is to push retail investors more into long term investing than into speculation, which generally happens to be a zero-sum game. In the case of futures & options, the risk to retail investors gets magnified since it is a leveraged product and also options are not too well understood.

• A SMALL STEP FOR INTERNALIZING FINANCIAL PLANNING

The Union Budget may also be a small step to encourage people to plan their finances in a more methodical manner. For a long time, most investors gravitated towards equities because the returns were higher and the taxes were lower. Today, the rates of tax on short term and long term capital gains on equities have been raised. Hence, that advantage has also reduced. Also, some of the listed debt and hybrid funds now get preferential tax treatment and with the reduction of long term definition to 2 years, things should change. Investors are likely to be more neutral towards asset classes like equities, listed bonds, hybrid funds, ETFs, FOFs, and REITs / INVITs. It will allow retail investors a more comprehensive approach to their financial planning.

• IN DEFENCE OF DEFENCE SPENDING

One major criticism of the budget has been the defence allocation has not spiked much since the interim budget. However, that would be missing the point. In reality, it is the quality of the outlay that matters, and that is where Budget 2024-25 scores. Consider these numbers. The budget has allocated about ₹6.22 Trillion for defence. That is 18.4% higher than the FY23 allocation but just about 4.8% higher than the FY24 allocation. However, what is material is that nearly 27.7% of this outlay for defence goes into capital spending. If you compare the capital spending with previous years, then it is 20.3% higher than FY23 and 9.4% higher than FY24. More importantly, nearly 75% of the modernization budget will be farmed out as orders to domestic companies, making it a class example of Atma Nirbhar Bharat. This budget also has some unique features like 48% higher allocation for operational readiness, which is key in a crisis situation.

If you add up these 10 factors, it is apparent that this budget has several underlying themes to it. Budget 2025-26 in February 2025 may be the real reformist budget from this government, but the tone has been set by the full budget presented on July 23, 2024.