Budget 2024-25: Gentle nudges over bold reforms. Politics over economics

The government is likely to increase allocations to schemes that tend to have a spillover effect on the grassroots - including PM-Kisan Samman Nidhi

The Union Budget on July 23 will be the one where the Modi-led government will be looking at staving off any unnecessary headlines that could push them on the backfoot. One of the most significant ones being the ‘suit boot ki sarkaar’ jibe – translating into the government being soft on big business.

In the 2024 national elections, the BJP lost ground in crucial states like Uttar Pradesh, West Bengal, Maharashtra, Karnataka, and Rajasthan. Significantly, the BJP is in power across all these states all barring West Bengal. The message from the loss is that grass root economy needs a boost and the best way to do that is through bolstering of schemes. At the back of their mind, the BJP knows there are challenges. “They are not convinced that the economy is firing on all cylinders,” says a source who has been part of government consultations.

The government has the fiscal space to spend - bolstered by a massive RBI dividend payout of Rs 2.1 trillion - higher than the government’s budget estimate and analysts’ expectation of Rs 1 trillion and 141 percent larger than the Rs 87,419 crore dividend payout in FY23.

“If they have a little bit of fiscal space, they might spend now than rue the fact that they could have,” says a source.

Making all the right noises

The government is likely to stick to its path of fiscal consolidation and its target of bringing fiscal deficit below 4.5 percent of GDP by the financial year 2025-26 and 5.1 percent for 2024-25. “What the rating agencies say is important for the government and populism is likely to happen through states,” said a person familiar with budget priorities.

Income tax cuts, as being reported, would impact a small section of Indians but these are the Indians who make the maximum noise. Income tax cuts for those earning between Rs 5 lakh and Rs 15 lakh is being contemplated to boost consumer spending and also spread the feel-good factor. Finance Minister Nirmala Sitharaman, has been trolled mercilessly on social media since she took charge as finance minister and one of the chief allegations against her has been that the government hasn’t done enough for the tax-paying middle class.

The government, this time around, also faces demands from its alliance partners, notably the Telugu Desam Party and Janata Dal United. Giving a special package or a special status to these states could open a pandora’s box for the government. Moreover, what defines a special status continues to be a subject of much debate, and while a special package again could make for bad optics, the government could increase allocations for some state-centric schemes with emphasis on infrastructure creation.

There could also possibly be an excise duty cut. Petroleum Minister Hardeep Singh Puri has said that the government had cut excise duty on petrol and diesel by Rs 13 and Rs 16 a litre between November 2021 and May 2022.

According to estimates, a cut in excise duty on fuel by Rs 1/ ltr is estimated to result in revenue losses of Rs 124-140 billion. Currently, fuel taxes constitute 37 percent of the retail fuel price in the country-with approximately 21 percent attributed to Central excise duty and 16 percent to state Value Added Tax. An excise duty cut will give consumption a boost. To boost manufacturing, experts have suggested rollback of the inverted duty structure, brought in initially with the aim to build supply chain ecosystems in the country. However, industry associations have appealed that such protectionist moves are detriment to the competitiveness of Indian industry.

The budget could reverse some of the revisions it had made in the earlier budgets on customs duties. The fact that countries like Vietnam with relaxed local sourcing norms have leaped ahead of India has lessons for Indian policymakers. Vietnam’s electronic exports are ten times that of India. Policy advisors to the government have been advocating for a level playing field for Indian manufacturers, for India to grow, it needs to get a larger share of the world trade. Export competitiveness will come from easier and cheaper access to inputs, they say.

The government also faces the contentious question of the Agniveer scheme, which was brought in to reduce the mounting pension bill of the defence forces but has not gone down well with the people and scrapping it has been one of the demands made by the alliance partners. If the government were to scrap the scheme, it would end up undoing a fiscal reform. While the finance ministry has flagged it as a challenging scheme, determining its future will be a tight ropewalk for the government. While other schemes such as Har Ghar Nal and PM Awas Yojana have been success stories and focus on them is likely to continue.

The government is likely to increase allocations to schemes that tend to have a spillover effect on the grassroots - including PM-Kisan Samman Nidhi. It could steer clear of introducing a fresh scheme for the sheer challenge of conceptualising and executing it.

“The thing with a scheme is that if you implement it, you cannot roll it back. And the RBI dividend won’t be there next year. Increasingly, I am getting a sense that the populism will pass onto state government,” said a source.

“If you have to pour money for votes, you have to do these schemes at the state level. Ten states have announced cash transfers to women.

Maharashtra, in fact, has cut capex for cash transfers to women. There is no point for the Central government to announce such schemes,” the source went on to add.

Another source has added that the government could be considering an increase in the long term capital gains (LTCG) tax on equities. “The call will be more political than economic; it will be against the one community that is supporting the government.” But such a move will nudge the political narrative away from Suit-Boot - which has resonated somewhere.

Politics with prudence

The macro math says that the government has the funds this time around, the RBI dividend is there for the government to stick to its path of fiscal prudence, boost infrastructure and consumer spending. Economists caution that there is no point in reducing the deficit further from the targeted 5.1 percent. The intent of the government is to spend and support the economy across sectors especially farmers, MSMEs. Other sectors that could get a boost include railways, power, water.

The budget is also likely to have a package to boost tourism and tweak the PLI scheme for textiles to include garments. “Tourism has the potential to create jobs. How do you create clusters in tourism, there could be some packages for cluster tourism to boost employment?”

Overall, this could be a budget that could prioritise small over big. Gentle nudges over sweeping reforms. Feel good over status quo.