Budget Review 2024-25: It was a budget with a soul

1 Feb 2024 , 05:14 PM

WHY IT WAS A BUDGET WITH A SOUL

When Nirmala Sitharaman stood up to present up the Interim Budget 2024-25, the expectations were mixed. At one end, there were the optimists who believed that, like in 2019, the budget would think and act like a full budget. There were also the pessimists who believed that the Union Budget 2024-25 would be used as a tool to circumvent the model code of conduct. However, the Finance Minister decided to take the third path and present a budget with a soul. We call it a budget with a soul since it has its head and heart in the right place. It is pragmatic in that it has tried to draw a fine balance between capex spending, fiscal prudence, and growth. 

The nominal GDP pencilled in by the government is about 10.5% for the fiscal year, but the tax buoyancy ration is just about 1.2X, although the year so far has seen tax buoyancy of 1.4X. Clearly,  the government is being conservative about tis revenues. The budget refrained from any direct or indirect tax changes, which is a logical move. However, it has given the much needed to the pressing demands of sectors like infrastructure, housing, agriculture, and technology. At the end of the budget speech that lasted less than an hour, even the opposition had to grudgingly admit that the budget was well thought through. After all, it was a budget with a soul.

A SHARP CUT IN FISCAL DEFICIT

There are two things that the Interim Budget 2024-25 did, that were impressive. Firstly, it cut the fiscal deficit estimate for FY24 from 5.9% to 5.8%. That is much better than expected. Secondly, the big news was that the fiscal deficit for FY25 was cut to 5.1%. That is much lower than the street estimates which ranged between 5.3% and 5.5% of GDP. A targe to 5.1% fiscal deficit for FY25 means that the government can now venture even below its 4.5% fiscal deficit target by fiscal year FY26. 

A lower fiscal deficit has several distinct advantages. It is generally viewed positively by the global investors, so it is likely to be accretive for FDI and FPI flows. Also, fiscal prudence is something that the rating agencies like Moody’s, S&P and Fitch lay a lot of emphasis on. Fiscal responsibility has been the key for most emerging economies and this also will ensure that India gets to maintain its sovereign rating and outlook and eventually even hope for an upgrade. But above all, the implication of lower fiscal deficit is in lowering interest rates.

KEEPING CAPEX GROWTH STEADY

Here again, the room was divided between two extremes. On the one side, the optimists expected that the government will continue its 30% growth in capex yoy, which we had witnessed in the last two years. On the other hand, there were others who expected that the government may curtail capex to make room for lower fiscal deficit. Here again, the government found a delectable middle path. The 30% growth was obviously going to be influenced by the audacity of large numbers. The government decided to grow its capex by 11.1% to Rs11.11 trillion for FY25.

Here, there are 3 things to remember. Firstly, 11.1% growth on a capex spending base of Rs10 trillion itself is quite large. In fact, it is 3.4% of GDP, so you can really fault the government for not doing enough on the capex front even in a tough year. Secondly, the capex impact is not felt in one year but it creates externalities that can be felt over the next 3-4 yeas. Hence, in FY25, we not only get to see the impact of the current spending but also the impact of cumulative spending of previous years. Lastly, government has set the ball rolling on capex and the private sector is also chipping in. The cumulative impact will still be huge and that is something analysts need to factor in.

ARE YOU YOUNG, AMBITIOUS, AND ENTERPRISING?

One of the big concerns for the government is that, if not nurtured, the demographic dividend can also become a demographic nightmare. A huge army of young educated persons is a great asset to any nation and India is no exception. However, this cannot be taken from granted. The government and the private sector together can only do so much to provide gainful employment. The other option is to provide young people the opportunity and funds to chase their dreams. That was addressed in the Interim Budget.

The government has announced the setting up of a special innovation and research corpus of Rs100,000 crore. Obviously, this will also get participation and the effect could be a multiplier effect. What the corpus will do is to give long term loans of tenure of 50 years on a zero-interest basis. However, such loans would be given to persons who can bring some new technology or innovation to the table. With the rapid growth in green energy, artificial intelligence and blockchain formats, the opportunity is huge and now the government also has a vehicle to tap this big shift.

WHY SHOULD REGULAR BUDGETS HAVE ALL THE FUN?

The FM has underlined that even interim budgets can make a serious effort at growth. Here are some of the key things that the interim budget has focused on, despite being for a brief period of just about 3-4 months.

• On behalf of the Indian Railways, the Interim Budget announced 3 major corridors; which include the port connectivity corridor, energy/minerals/cement corridor, and high traffic density corridor. Thes are likely to smooth logistics flow.

   

• Under the rooftop solarization program, over one crore households will get up to 300 units of electricity free of cost every month. Households will save up to Rs18,000 annually, which can be a big consumption booster for lower income households.

   

• The PM Awas Yojana is nearing its target of 3 crore houses. It now plans to further expand this to 5 crore houses, so that most people can now dream of a roof over their heads

There are also specific announcements for agricultural sector. The moral of the story is that the government has not been discouraged by the limitations of an interim budget. It has still gone ahead and presented a budget with a soul!