Know how Union budget is going to create an impact on your finances

Different aspects in budget, such as big policy announcements, allocation to different schemes & ministries, and the changes in tax laws can impact your life.
Union budget.
Union budget. (Photo | Shekhar Yadav, EPS)

NEW DELHI: The government will table the Union Budget on 23 July. Media is already abuzz with reports that the government will take steps to leave more money in the hands of the common man by way of income tax relief. But changes in income tax provisions alone would not impact you, the budget as a whole can impact your finance directly or indirectly.

There are different aspects to the Union Budget – big policy announcements, allocation to different schemes and ministries, earnings and expenditure estimates, and the changes in tax laws. All these can impact your life in some or other way. We list the ways the Budget announcements impact you and your finances in the long run.

Fiscal deficit and borrowings: The government in the budget gives estimates of its revenue and expenditure, and accordingly arrives at a fiscal deficit number. This deficit is funded by the market borrowings. When borrowings by the government go up, it means more government bonds are issued. This leads to higher yields in the bond market. When the government needs more money, they offer higher interest.

Higher yields on government bonds means corporates also have to pay more for borrowing, therefore, higher yields on corporate bonds as well. It also increases borrowing costs from banks and other financial institutions. While this is good for new investors looking to enter the bond market as they can get better interest on their investments, existing bond investors or fixed deposit holders may lose out to the higher rates. On the flip side, retail borrowers would have to pay more interest on the loans they are taking from banks and NBFCs.

The good news is that the government is awash with cash this year with a handsome dividend of R 2.11 lakh crore from the Reserve Bank of India, and experts hope that the government might have lower fiscal deficit than expected, resulting in lower borrowings. This could lead to yields on government bonds, which are hovering around 7.1% to come down to 6.8-6.9%.

Higher allocation to education and healthcare: In India, the budget allocation to education is a mere 2.9% and healthcare is 1.2% of the GDP. This is puny compared to many developed and emerging economies. Proliferation of private sector in both the sectors have made basic amenities like healthcare and education unaffordable for a large section of the society. If the government substantially increases its allocation to these two sectors, it would necessarily mean affordable healthcare and education for the country.

Mere higher allocation alone, however, does not ensure better facilities. It has been seen that despite higher allocation, actual money spent on these facilities is lower than the money provided for. So apart from higher allocation, the government also needs to spend the money to improve these facilities in the country.

Higher Capex spending: Higher capex spending by the government means more infrastructure and real asset creation by the government. The Modi-led government has raised the allocation on capital expenditure from R3.2 lakh crore in 2018-19 to R9.5 lakh crore in 2023-24.

Higher allocation to capex has a higher multiplier effect than that of revenue expenditure (spendings on salary and pensions). As per some estimates, higher spending on capex leads to 2.5-3.5x worth of value for the economy. This could not only mean better infrastructure, but also means more job creations and improved earnings for the common man.

Reform measures: Though the government need not wait for the Budget to announce any big reform measures, it has used the budget to make bold policy decisions in the past, and there is no reason the government may not do so in the forthcoming budget. It is likely that the government may notify some of the reforms in the insurance sector – including a push for insurance for all by 2047 and privatisation of non-life insurance PSUs. The government may also expand the Ayushman Bharat Yojana to cover Senior Citizens above 70 years. Currently, Ayushman Bharat Yojana covers only the bottom 50% of the population.

Tax-related announcements: Personal tax related announcements have direct impact on most common man. This year in the run-up to Budget, a lot of speculations have been made with regards to tax relief for the middle class. “The tax relief can be in the form of higher standard deduction (currently at R50,000) for taxpayers in the new tax regime, and minor tweaks in the income tax slabs,” says Poorva Prakash, Partner, Deloitte India (Personal Tax).

While income tax changes impact a smaller section of the society, changes in GST rates may have a far wider impact. Since such decisions can only be taken by the GST Council, the government can at least make some announcement on the rate rationalisation just for an inkling of the direction GST rates would go.

Also, a statement on inclusion of petrol and diesel under the GST may make a big impact. The direction of the Budget – fiscally prudent or expedient – would also impact the sentiments in the equity market and debt market. If the government remains fiscally responsible, both the equity markets – which are in a sort of bull run, may get more leg to continue its upward run.

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