Budget reflects new realities of political landscape
THE first Budget of the new government reflects the new realities of the political landscape, even as it seeks to move towards higher and more inclusive growth. Agriculture and employment, along with skilling, have been given pride of place, even as efforts have been made to cool down bullish equity markets. The infrastructure push continues, but the private sector is now clearly expected to shoulder the burden of higher investments. As for the long-suffering salaried middle class, it has finally been given its due with a cut in the standard deduction and reduced tax rates. Stock markets may be unhappy with some levies, but the abolition of the angel tax and corporate tax cuts on foreign companies are set to give an impetus to investments. Despite these cuts, fiscal prudence remains a major achievement, with the deficit being brought down from 5.1 per cent in the Interim Budget to 4.9 for 2024-25.
Finance Minister Nirmala Sitharaman’s seventh Budget looks to the future. But the next-generation reforms have been set aside for a new economic policy framework. Though some steps are proposed in the critical area of land reforms, with the digitisation of rural and urban land records, others have been left to await the unveiling of this new policy. Medium and small industries must also wait until more detailed proposals are formulated to get rid of the licensing and compliance rules that have been a huge burden for the sector.
On agriculture, the focus is rightly on research in the areas of productivity and climate change, as experts agree that it is time for this sector to pivot in a new direction. Decades after the Green Revolution, which brought prosperity and plenty in foodgrains, the agriculture economy now has to move towards other crops and improved efficiency. Vegetables, oilseeds and pulses are thus given higher priority in the Budget along with marine products like shrimp, which dominate the export basket.
What stands out in the budgetary proposals, however, is the detailed plan outlined for employment and skilling, clearly in response to the clamour for jobs, which was a dominant theme in the elections. The proposals envisage employment subsidies in the formal sector, for which Rs 1.48 lakh crore has been allocated in the current fiscal. From providing the first month’s salary to the support in provident fund deductions, the set of schemes is expected to benefit 29 million youth in new jobs. The onus is also on business houses to ensure that some funding is provided through their corporate social responsibility corpus.
Skilling has not been left out either, and a new Centrally sponsored scheme for this purpose will upgrade Industrial Training Institutes in line with the industry’s needs. It is expected to benefit two million young people. The only snag is that, so far, such skilling education has not been effective enough to meet the needs of many sectors. There is, thus, the incongruent situation of jobs being available but not enough trained personnel to fill them. A more nuanced approach needs to be taken to such skilling programmes by involving leading agencies so that the end result is an employable individual.
The need to push up female labour force participation is mentioned in the form of a public-private partnership in setting up women’s hostels and crèches. But details of the proposal are yet to be given. Other schemes are also specified for promoting greater market access for women-led cooperative enterprises. But there needs to be much greater emphasis on providing support to women to enter the labour force in a deeply patriarchal society.
The other element in the Budget that is clearly the outcome of political compulsions facing a coalition government is the largesse being showered on the states of Bihar and Andhra Pradesh. The new Purvodaya scheme for the eastern region, however, will probably provide a long-awaited thrust to infrastructure in the slowest-growing region of the country. Significantly, the funding is being provided not just from the Centre but through multilateral financing institutions.
Andhra Pradesh is an outlier in the eastern region in terms of economic development. Even so, it needs a massive infusion of funds, both for the new capital and the critical Polavaram Irrigation Project. Here, too, there will be a mix of funding from the Centre and multilateral institutions. But a clear signal of reassurance has gone out to the key coalition partners, Nitish Kumar and Chandrababu Naidu, that finance will be provided for essential infrastructure in both states.
It is in the area of taxation, however, that the Budget proposals have likely given the most joy and the most grief to different segments. The increase in the standard reduction as well as the alteration of personal income tax rates are bound to please the salaried middle class. The catch is that taxpayers will have to opt for the new tax regime without any exemption to avail themselves of the new rates. Yet, it was a long-awaited change, and Sitharaman had the fiscal space this year to finally fulfil the expectations of the salaried segment.
Foreign companies have also been given a cut in the corporate tax rate from 40 to 35 per cent. It could conceivably reverse the declining trend in foreign direct investment. The removal of the angel tax will similarly be greeted by hosannas from the startup community, as it was aimed at fledgling companies in this segment.
As for the increase in the short- and long-term capital gains tax as well as the hiking of the securities transaction tax on futures and options trading, the stock markets had a gloomy reaction. They traded in the red for the whole day, evidently in the fallout from the tax hikes.
The first Budget of Modi 3.0 is thus marked by pragmatism rather than populism. The exchequer had the benefit of an infusion of funds from the RBI earlier in the year, allowing fiscal prudence along with a continued push in public capital expenditure. Yet, the launch of the badly needed next-generation reforms, especially in ease of doing business, is still awaited, as these will generate a major stimulus to the economy.
