No pandering, smart adjustments and boosting urban redevelopment are budget’s highlights

Budget 2024 bears the firm imprint of the Prime Minister’s steadfast resolve to not let ‘political expediency result in bad economics.’

The first budget of Modi 3.0, so eloquently presented by Finance Minister Nirmala Sitharaman, bears the firm imprint of the Prime Minister’s steadfast resolve to not let ‘political expediency result in bad economics.’ Consequently, all commentators expecting handouts for better electoral outcomes for the ruling party, in the coming three state elections have been again disappointed. There is not even one announcement in the budget that could be singled out as pandering to the voters’ whims and wishes.

Yes, there has been the expected fiscal attention given to Andhra Pradesh and Bihar, but this also has been done with a degree of finesse so as not to derail the continued focus on fiscal consolidation. The majority of allocations to these two states will be arranged as additional resource mobilization with the help of multilateral development banks, presumably as soft interest loans underwritten by the central government. Smart move.

Fiscal consolidation will boost private capex revival

The fiscal deficit is targeted to be brought down to 4.9% from the earlier estimate of 5.1 percent. Clearly, the government decided not to splurge windfall receipts from the RBI which handed over a dividend income, double the amount assumed in the interim budget.

With lower fiscal deficit, and the expected larger supplies of foreign portfolio capital inflows, as India’s weight in international bond indices improves further, we may see a softening of bond yields. This will give the RBI needed confidence to reduce interest rates, which in turn will likely drive greater capital investment by corporates and also by households in real estate. The private investment cycle, already on the upswing, finally, will be reinforced.

Four highlights

Apart from resisting the ‘rewari’ temptation and, standing firm on fiscal consolidation, there are, among several others, four features that would stand out for positive acclaim for this budget.

First, is the government’s admission that employment generation is a top priority and announcing direct measures to try and generate more jobs. The three schemes announced in the budget will incentivize the employers to take on a larger number of workers on their rolls as regular and not contract workers. It is to the credit of the finance minister and her team in North Block that they did not ignore a good suggestion even if the opposition may claim its parentage. Good economics should remain party agnostic.

The second positive feature is the emphasis on raising productivity in the agriculture sector and announcing a comprehensive review of the agriculture research establishment. This should yield high returns because at present ICAR’s contribution to making our agriculture globally competitive is rather modest. But for me an even more important feature of the budget is the announcement for targeting an expansion of natural farming package to  one crore farmers over the next two years. This will indeed be a game changer. A paradigm shift is in the making in the Indian agriculture sector, which will surely become an exemplar for other countries. Bravo.

The third commendable feature of the budget is its focus on ‘creative redevelopment of cities.’ The budget recognizes that it will be cities, with their dynamism and talent pools, which will drive employment generation and economic growth. The targeting of 14 cities with populations larger than 30 lakh for transit-oriented development; urging the states to reduce stamp duties specially for women house owners; building one crore houses for the urban poor under the PM Awas Yojna; taking the PPP route to build dormitory style housing for industrial workers are all solid initiatives to give the cities their due in driving employment and growth.

Finally, the measures announced for ensuring energy security while accelerating the transition to ‘green energy’ are commendable. I am particularly enthused by the allocation for R&D for small modular nuclear reactors as they may be the best substitute for the base load currently provided by coal based power plants.  However, I hope that the government will continue to look for an expeditious introduction of SMNRs through transfer of technology by global private companies, which may have already made substantial advances in this field.

Promotion of pump storage for utilizing the seasonally variable power from solar and wind sources is a long awaited move. The encouragement for roof top solar energy with the provision of 300 units of free energy will also help the country minimize its carbon footprint as it increases its energy production by 2-3x in the coming decades. That large increase is required to bring the Indian consumer at par with the global average energy consumption.

Features that could have been there

Some features that I would have liked to see in the budget include, i) an ambitious target for privatization of public sector enterprises especially now that their market valuations are at sky high; ii) a target for asset monetization which will convert poorly and inefficiently utilized government assets to more productive use. At the same time, revenues from privatization and asset monetization will help reduce the public debt to GDP ratio and reduce the interest pay out, which today swallows as much as 40 percent of tax revenues. iii) a time-bound plan for reducing and eliminating the dysfunctional regulatory and compliance burden specially affecting  the small and medium enterprises who don’t have the wherewithal to establish large government relations departments.  And iv) the finalization of the labour codes that has been going on for the last several years.

Hopefully, a time bound plan for this and for minimizing the ‘regulatory cholesterol’ will form a central part of the ‘Economic Policy Framework’ that is expected to be finalized in the next six months.

Overall, a well-crafted budget with an eye on the longer term, during which India has to successfully address the substantial twin challenges of accelerating employment generation and reducing its carbon footprint while sustaining a 7-8% rate of economic growth.