Pre-Budget signals on fiscal prudence and capex increase
In the run-up to the presentation of the Union Budget for 2024-25 on July 23, various signals are coming out from North Block on the overall stance and approach of what would be Finance Minister Nirmala Sitharaman’s first Budget in the third term of the Modi government. On the fiscal consolidation front, the full Budget for the current year is expected to either adhere to the target of 5.1 per cent of gross domestic product (GDP), indicated in the Interim Budget of February, or present a slightly lower target of 5 per cent. An ideal approach would be to reframe the trajectory of fiscal consolidation in light of the current government debt level of over 57 per cent, which is much above the target of 40 per cent of GDP. With net household financial savings having dipped a little and the current account deficit staying at below 1 per cent of GDP, the current levels of government deficit does not leave enough room for meeting the private sector’s borrowing needs. Thus, a new trajectory for reducing the fiscal deficit would be ideal. The current year in that sense is an opportunity as the government has got an additional transfer of surplus from the Reserve Bank of India, amounting to about 0.4 per cent of GDP. This could be used to bring down the deficit from what was projected in the Interim Budget. However, the demands on the central exchequer on account of a justified increase in capital expenditure (remember that the private sector is yet to revive its own investment) will have to be addressed. It is likely that the Centre’s capital outlay goes up by at least 20 per cent over what was spent in 2023-24. On the revenue expenditure side, there will be demands for increasing the outlay to improve the coverage of the health insurance scheme, raise the minimum wage entitlements under the Mahatma Gandhi National Rural Employment Guarantee Scheme, enhance the outlay for the PM Kisan scheme to fund a higher transfer to farmers and improve the allocation for rural housing across the country. On the taxation front, the new regime for personal income tax could be made more attractive and the new corporation tax structure, introduced in 2020 particularly for new manufacturing companies, could be continued for a few more years. Nevertheless, for the finance minister, it will be a tough Budget exercise. But given the revenue buoyancy already reported in the first quarter of the current financial year (net direct tax revenue jumped by about 21 per cent and collections under the goods and services tax or GST rose by over 10 per cent) and an improved projection for the economy’s nominal growth, the finance minister can spend more, but at the same time collect more to bring down the government’s fiscal deficit.
Sectoral push likely for asset monetisation, exports and AASHA
At the sectoral level, the Budget for 2024-25 could unveil a few more initiatives to perk up the Indian economy. Even as the push towards privatisation may not be seen in the Budget, emphasis on asset monetisation is likely to take precedence over disinvestment of government equity in public sector undertakings or PSUs. The Railways Ministry is looking at increasing monetisation of its assets to raise additional revenue of about Rs 17,000 crore in the current year. So far, the Indian Railways has monetised about Rs 21,000 crore worth of assets against a target of Rs 68,000 crore, set by NITI Aayog. To the extent that the Budget introduces policy changes aimed at enhancing the competitiveness of the exports sector, the finance minister could be expected to look at two specific schemes. At one level, the Budget may consider relaxing the many customs rules, whose compliance is burdensome for exporters. Thus, duty anomalies could be weeded out, a few necessary customs exemptions could be retained and compliance rules eased so that tax leakages are also curbed. The second initiative on the exports front could be to help exporters overcome the many non-tariff barriers they face in many export markets. There are also signals on how the Budget could increase financial allocations for a host of social sector schemes in areas such as health, education and rural development. The objective is stated to be to ensure that higher allocations would help boost rural demand. The Interim Budget for 2024-25 had provided only four per cent more outlay for central sector schemes and centrally sponsored schemes. The expectation is that the allocations could be raised by a higher margin in the full Budget on July 23. A restructuring of the flagship Pradhan Mantri Annadata Aay Sanrakshan Abhiyan or PM-AASHA and an announcement of minimum support price for select pulses and oilseeds through 100 per cent direct purchase or price-deficiency payments are also on the cards. In order to enhance the attractiveness of the Make in India scheme, the Budget may stipulate new norms for minimum local content requirements in public procurement schemes in sectors such as steel, chemicals and pharmaceuticals.
PM views on Budget indicate push for welfare schemes & growth
More indications on the forthcoming Budget were available from what Prime Minister Narendra Modi said in Parliament and during his meeting with economists. In his Rajya Sabha reply to the debate on the motion of thanks to President’s address to Parliament, Modi gave clear hints that the Budget would focus on welfarism, developmental schemes, fiscal discipline and a laissez faire approach in dealing with the private sector to achieve higher growth. While there was a need for reducing the role of government in the day-to-day lives of people and functioning of businesses, the prime minister also assured state intervention for those who needed it. He also advocated for more reforms in the government’s economic policies. A day earlier on July 2, Modi had said in the Lok Sabha that the mandate for his government was for speed of decision making and continuity and the goal was to propel India to the next level of development and fulfil the ambition of becoming a developed country by 2047. At his meeting with economists on July 11, Modi reiterated the need for strengthening the social sector like health and education, even as he batted for increased collaboration with states in attractive investments. The focus would also be on how schemes that enhance the effectiveness of public delivery mechanisms.
Inflation rises again upsetting monetary policy calculations
Inflation reared its ugly head in June 2024, with both retail and wholesale prices rising by a higher margin than in the same month of 2023. Retail inflation, measured by the movement in the Consumer Price Index rose to 5.08 per cent. This was the first time in the previous five months that retail inflation rose. The increase was driven by higher food prices, whose inflation for June 2024 was estimated at 9.36 per cent. Food inflation was caused largely by higher prices of cereals, fruit, vegetables and sugar. However, core inflation, excluding food and fuel components of the Index, stayed at a benign level of 3 per cent. But for the Reserve Bank of India, it is the general retail inflation that is a cause for concern. The government-mandated retail inflation target is 4 per cent. Food was the culprit even for the rise in the Wholesale Price Index, which rose for the fourth consecutive month in June to a 16-month high of 3.36 per cent. Wholesale inflation in food items was estimated at 10.87 per cent. A year ago in the same month of June, wholesale prices in food had contracted by over 4 per cent. With both retail and wholesale inflation rising, the government as well as the RBI would have to refocus their energies in containing the rise in prices, even as politically significant Assembly elections are scheduled to be held in states like Maharashtra and Haryana in the next few months. The RBI’s approach to monetary policy in the coming months will also be influenced by the retail inflation trajectory.
India signs ambitious pact with Russia to raise bilateral trade
In his second overseas trip (his first was to Italy) after he assumed charge at the head of the Union government in June, Prime Minister Narendra Modi visited Moscow and signed an agreement with Russian President Vladimir Putin on July 9 that aspired to raise bilateral trade between the two countries to $100 billion by 2030, balance the lop-sided trade, eliminate non-tariff trade barriers and explore the possibility of a Free Trade Area between Eurasian Economic Union and India. Bilateral trade between India and Russia stood at $65.6 billion in 2023-24. However, India exported only about $8 billion, while it imported $57 billion of goods, mostly crude oil, from Russia. A joint statement signed by the two leaders also envisaged that the two countries would set up a bilateral settlement system using national currencies and introduce digital financial instruments into mutual settlements. The discussions between India and Russia during Modi’s visit to Moscow focused on economic collaboration in areas such as energy, trade, manufacturing and fertilisers. While the target of almost doubling bilateral trade between India and Russia in about six years looks ambitious, the more complex challenge would be to balance the trade between the two countries.
GST data reveals slowing collections trend
Among the few high-frequency indicators of the pace of India’s economy, the monthly release of the data on collections of goods and services tax (GST) has always been keenly awaited by economic analysts and investors. However, the month of July 2024 saw a departure from that practice, followed by the GST Council without fail in the last seven years. The GST was launched from July 1, 2017. There are no official reasons for scrapping the monthly release of the data. All that was made available through unnamed official sources was that June 2024 recorded a GST collection of Rs 1.74 lakh crore, which was 7.7 per cent higher than Rs 1.61 lakh crore collected in the same month of 2023. Evidently, the June collection growth was lower than the 10 per cent rise recorded in May and 12.4 per in April. For the first quarter of 2024-25, therefore, GST collections grew by about 10 per cent. Clearly, the pace of collections has slowed a bit. A meeting of the GST Council is to be held soon after the presentation of the Budget for 2024-25. Among the items on the agenda for GST Council’s next phase of reforms are rate rationalisation, inclusion of items such as petroleum products and alcohol and reducing the multiplicity of rates into three slabs along with a resolution of how the compensation cess should be treated after the repayments of past loans taken on behalf of the states are completed. A new item on the agenda would be on how the GST Council could revert to the earlier system of officially releasing the monthly data on tax collections along with their detailed break-up. This will not only mean more transparency but also display the government’s confidence in sharing relevant data with the community of global and Indian investors.
RBI study on jobs aimed at resolving the employment debate
A report by the Reserve Bank of India (RBI) released in early July 2024 brought out job market data that should have cheered the government, which has been trying hard to improve the employment situation in the country. The RBI report, based on the KLEMS (capital, labour, energy, materials and services) database and which measures both employment and productivity, concluded that India had added about 47 million jobs in 2023-24, much higher than what a few other estimates had shown. Employment growth was estimated at 6 per cent for 2023-24, almost double of the 3.2 per cent growth rate recorded in the previous year. The RBI report came amidst a major debate and controversy in the wake of another report, released by Citibank, which noted that India would struggle to create enough jobs for the growing workforce even with a 7 per cent annual economic growth rate. The Citibank report had estimated the requirement for India to create jobs at 12 million a year over the next decade, but the projected annual growth rate would be able to create only 8-9 million jobs a year. Apart from the RBI, the Union labour ministry also reacted to this by noting that its Periodic Labour Force Survey and the RBI’s KLEMS database had shown that India had created more than 80 million jobs from 2017-18 to 2021-22, or on average about 16 million jobs per year. The ministry note also pointed out that the unemployment rate had declined from 6 per cent in 2017-18 to 3.2 per cent in 2022-23. Clearly, the debate over jobs in the country has been reignited once again.
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