There is a certain irony here. The BJP-led NDA government‘s current term (2019-24) has coincided with global upheaval that has led finance ministries across the world, including in New Delhi, to go back to the drawing board more than once.
As such, Sitharaman has had three fresh-start budgets and related initiatives – in 2019, following the election victory; in 2020-22, with Covid-era fiscal recalculations and reforms both mid-year and as part of the budget; finally, the budget announcements yesterday, factoring in the pandemic’s aftermath, the Russia-Ukraine war’s continuation and the (at least) near-term inflationary risks and international economic volatility.
Navigating the economy through such choppy waters, while pursuing long-term strategic objectives, maintaining fiscal prudence and optimising opportunities offered to India in this challenging but transformative decade, is not easy.
Both Sitharaman and her boss, Prime Minister Narendra Modi, deserve credit here. They have not lost their heads. More important, they have not lost sight of the country’s goals.
Whether at home or abroad, stakeholders in the economy will be reassured by this budget. It keeps India well on the path to a sustained period of growth, one in which it will contribute, as has been estimated, at least a fifth of incremental global GDP between now and the end of the 2020s.
Five noteworthy points in the budget are of particular interest. Capital expenditure and infrastructure spending have got a decisive boost, maintaining a momentum that has marked this government’s spending. Capital expenditure outlay has risen by 33% to hit ₹10 lakh crore (roughly $125 billion). There is appreciable attention to transport infrastructure (railway and air connectivity) and logistics.
Wherever attempted, rejigging of customs duties and tariffs has been aimed at promoting domestic manufacture and allowing easier import of components. Policymaking has been focused to this end.
Green transitions have been incentivised using a range of tools – putting aside money for replacing old and polluting government vehicles – in turn, creating demand for the domestic auto industry – supporting renewable energy with viability gap funding (VGF) for battery storage; and more funds to facilitate e-vehicle adoption.
Fiscal discipline has been resolute. From 6.4% in FY23, the fiscal deficit target for FY24 is 5.9%, with a promise to reach 4.5% in FY26. Considering the burden of the pandemic years, this is commendable.
The modernisation of India’s historically infuriating personal-tax regime has been pertinaciously pursued. While two regimes – one with exemptions/tax breaks and a higher rate, and one with zero exemptions and a lower rate – continue to exist, the ‘new regime’ is down to five slabs from six, with a peak rate of 30%. True, there should ideally be no more than perhaps three slabs, and those mid-career – and locked into tax-saving insurance schemes and mortgages – will still weigh pros and cons. Yet, for a younger professional, the decision should be easier.
Critics have pointed out that private investment is not exactly energetic and has not been so for much of the Modi years. While there is some truth to this, the context needs to be understood.
In 2014, the BJP-led government inherited a troubled economy, and companies were saddled with overleveraged balance sheets. Conditions were not conducive for private investment.
What followed was a determined banking clean-up, complemented by a massive infrastructure push and, later, lowered corporate tax rates. This allowed business to retire debt and repair its books, leaving it primed to invest.
That is when the prolonged unravelling of the pandemic and then the war hit. In 2023, with a recession in major countries and global demand shaky, private investment will be slow in coming.
Add to this the traditional corporate capital expenditure wariness in a general election year. Some 18 months from now, in the summer of 2024, things could be very different. If current predictions hold, the third Modi government would have entered office. If current hopes hold, the worst of the global economic slowdown would be behind us. Private investment will be set for a big surge.
Astute and realistic, the Modi-Sitharaman team has anticipated that public investment will have to be front-loaded and will have to carry the economy for just that while longer. A corporate investment upswing – and a stronger GDP growth – is inevitable as India enters the second half of the 2020s.
Should this come through, Modi’s next term will coincide with an unusually robust economic boom. That is the essential, and foundational, bet of this budget.
