The first Budget of the Modi 3.0 regime bore the imprint of policy continuity, and balanced growth impulses with tenacious fiscal consolidation, even as it used the resultant limited means to address the concerns around social and economic equity.
Finance minister Nirmala Sitharaman’s speech left no trace of an acknowledged intent for course correction, or a big shift away from a growth model driven by public capital expenditure that seems to have almost run its course. Hopes are still largely pinned on Corporate India taking the baton, sooner than later.
Nonetheless, the Budget gave greater thrust to provide “opportunities” for the “small” among the economic actors. It rolled out a clutch of initiatives to boost job creation and skilling, and increased the incentives to the small and medium industries, and various stakeholders in the rural economy, principally the farmers, and women.
The assorted new schemes, most to run over the next five years, include several employment-linked sops for firms, a new credit guarantee scheme for MSMEs, interest relief for educational loans, a tripartite project with states and industry that aims to impart job skills to 2 million youth, a doubling of the Mudra loans limit to Rs 20 lakh, and a plan to encourage the top 500 companies to provide 10 million internship opportunities.
For 2024-25, however, the additional expenditure from the February interim Budget estimate will be just Rs 55,000 crore; with capital expenditure retained at the same level. That takes the Budget size to Rs 48.2 trillion or 14.8% of the gross domestic product (GDP). The Budget was 15% of the GDP in FY24, and 17.7% when the fisc expanded suddenly to 17.7%, owing to the pandemic.
The multiple tax giveaways in the Budget, including a further sweetening of the new exemption-less personal income tax regime, would cost the exchequer just Rs 37,000 crore. Net of revenue gains from other tax measures, including the removal of the so-called angel and Google taxes, and a hike in short- and long-term capital gains taxes, the outgo is a measly `7,000 crore.
With such economy and a realistic revenue buoyancy estimate of 1.1, the minister proposed to reduce the fiscal deficit in FY25 to 4.94% of the GDP, down 0.22% from the interim Budget level, and the revenue deficit by the same measure to 1.8%.
That spoke of the government’s conviction on the fiscal front, given that the third Modi regime, unlike the previous two, is reliant on allies for majority, and an emboldened Opposition is seeking to put it on the mat for issues like rural distress and an “employment crisis”. So, the gross and net market borrowings for FY25 is estimated at Rs 14 trillion and Rs 11.63 trillion, respectively, both less than in the last financial year.
The yield on the benchmark bond, however, ended flat at 6.969%, as a large part of the reduction in government borrowings came in treasury bills, rather than dated securities. The Sensex swung over 1,500 points intra-day and ended down 0.09%.
Sitharaman said the fiscal consolidation path set in 2021 “has served our economy well”, and revived the pledge to the fiscal deficit target of to 4.5% in FY26 under a medium-term plan. The endeavour would be to keep the deficit in such levels that the Union government’s debt will be “on a declining path” as a fraction of GDP. This strategy, rather than laying a definitive fiscal glide path for the period after FY26, would give the government the requisite leeway on capex budgets.
The market volatility was mainly ascribed to the proposed changes to the taxation of capital gains. Tax on short-term tax capital gains from listed securities will go up from 15% to 20%, and the impost on long-term gains arising from listed securities and most other financial assets, from 10% to 12.5%. At the same time, the tax on long-term gains from unlisted securities will reduce to 12.5% from 20%, bringing parity. Since the indexation benefit will go away, no scope is left for investors to ward off a loss, by refreshing value. Small investors have, however, only to benefit from this overdue streamlining aimed at removing the arbitrage among asset classes, since the exemption threshold for long-term tax will rise to Rs 1.25 lakh from Rs 1 lakh.
The Budget also hiked the securities transaction tax on futures and options, in a bid to discourage retail investors from taking bets in this high-risk market. Sitharaman’s decision to tax proceeds of share buybacks at the hands of recipients, by treating them akin to dividend receipts, could hit promoters of information technology and other cash-rich firms, where the practice is most in vogue.
The minister announced abolition of the angel tax – introduced in 2012 to tax investment made in closely-held companies in excess of fair market value – a move that will help bolster the start-up ecosystem. Similarly, the end of the equalisation levy (Google tax) on digital services rendered to India consumers from foreign companies, would be a gain for global tech firms, aggressive on the buoyant India market.
However, the Budget was silent when India will usher in the so-called Pillar-I under the OECD multilateral tax framework aimed at apportioning corporate tax proceeds among jurisdictions. Uncertainty also remains on if India will adopt OECD’s Pillar 2, which seeks to ensure that multinationals pay a minimum 15% tax in each country of operation. There is a great deal of uncertainty about the Pillar solutions, as some western countries too have lately turned ambivalent.
A host of changes in the rates of customs duty, including a reduction in tariffs on gold, silver and mobile phones, was made, in keeping with the goal of encouraging domestic value creation. While the minister said a more substantive restructuring of the import tariff structure would be undertaken by the last leg of the year, the average tariffs would need to fall for greater openness to the external world.
A clutch of steps to reduce tax litigation and ease compliance including the re-introduction of “Vivad Se Viswas” scheme, is welcome; the promised re-drafting of the Income Tax Act, 1962, kindles hope.
The Budget was upfront in listing out financial support to Bihar and Andhra Pradesh, where the ruling BJP’s key alliance partners are in power. But this is unlikely to have implications large enough to upset the stated fiscal objectives. This is because investments via central PSEs and the Centre’s mediation of multilateral finance on behalf of these states would form large part of the assistance.
While the prime minister said the Budget would “empower sections of society”, and lay the foundation for a developed India, the Opposition called it “an exercise to save the government” and appease allies, at the cost of other states, adding that the government’s response to the unemployment crisis was “too little” to make an impact.