Union Budget 2024: The four themes of growth

Four priorities for Budget 2024-25.

Strong growth momentum, healthy external buffers and strong balance sheets of corporates and banks provide a favourable backdrop to the full Union Budget for this fiscal.

That said, stubborn food inflation, weak consumption demand and tepid private investments call for remedial measures. It also needs to be kept in mind that one quarter of the fiscal year is over and budgetary measures will at best influence the performance of the second half of the current fiscal.

We see four priorities this time:

Fiscal consolidation: Despite various imperatives, the government should not compromise on fiscal consolidation which has been its the hall mark. Fortunately, higher-than-expected dividend of Rs 2.1 lakh crores from the Reserve Bank of India (RBI) will allow the government to undertake additional expenditure, while sticking to the fiscal consolidation path laid out in the interim budget. This will keep the cost of borrowing for the government under check and help in bringing down the debt ratio will be in sync with monetary policy stance. It is also important to note that the inclusion of India in global bond indices subjects it to more fiscal scrutiny.

Weak consumption: Private consumption demand growth slowed to a two-decade low of 4% (excluding the pandemic year) in fiscal 2024. Some of the transitory factors that caused it are likely to reverse. If agriculture does well and food inflation comes down as is expected with prediction of normal monsoons this year, rural consumption demand will get a leg up. Urban demand may soften due to higher interest rates and slowing of services as the pent- up demand gets exhausted. The RBI’s consumer confidence survey, too, reflects weakening consumer sentiment. The budget could give some tax relief to the middle class which largely benefits the urbanites and support employment and income augmenting like rural infrastructure and housing development in rural areas.

Food inflation: Food inflation has remained stubbornly high since the last fiscal when it averaged 7.5%. In the first quarter of the current fiscal it spiked further to 9% with vegetable inflation at 28%. Inclement weather events accentuated by ongoing climate change disruptions are behind high food inflation. The Budget needs to allocate more resources to adapting to climate change and also speed up the creation of storage and transport infrastructure and for agriculture. We also need to raise productivity in agriculture for which R&D spending will need to go up. China with similar arable land compared to India produces much more foodgrains.

Enabling private corporate investments: For a sustainable lift in investments, private corporate sector needs to step up its role. Current lift in investments is largely coming from government’s infrastructure buildout and household investments. The ability of private sector to invest has been augmented by healthy balance sheets, competitive corporate tax rates. production linked incentive (PLI) scheme and crowding in impact of government investment. Till the time our logistics and power costs become competitive enough, government support may be needed to rekindle labour intensive sectors like textiles, gems and jewelry which have not done well in the last few years.

Finally, the government needs to pursue reforms. Past experience with economic reforms, be it 1991 or the introduction of Goods and Services Tax (GST) in 2017, informs us that their benefits take time to materialize. Pending reforms (land, labour) are needed for promoting private corporate as well as foreign investments and improving the growth potential of the economy.