During the Interim Budget speech, the FM had used the word aspirations or aspirational eleven times, the usage is down to just two during the final budget speech.
Does it mean that we have fulfilled our aspirations during the last six months, or have we scaled them down?
The Economic Survey, released on July 22, suggested that we are doing well as the employment problem has been solved and households are doing fine. If we needed another proof that all is well, the central budget has provided that as it has made no effort to raise additional resources and allocate them to areas that matter the most for the country.
Interim = Final
It would have saved us a lot of effort and resources if the finance minister had told the parliament that the interim budget may please be treated as the final budget for the year. The final budget like the interim budget refuses to recognise the challenges that we face.
I identify the following to be the challenges that we face at present:
1. Household stress is real, as the real earnings have been stagnant across sectors, which is reflected in slow growth in household consumption, savings, and investment.
2. MSMEs continue to struggle, impacted by demonetisation, unthinking GST implementation, and, of course, the pandemic.
3. Large private corporations have recovered from the pandemic shock, but they do not see any reason to build capacity ahead of domestic demand, as the household consumption growth continues to be low.
4. We continue to be a laggard in the goods export market and serve at the lower end of services export market.
5. Climate conditions are a real threat, as seen in episodes of urban flooding, mountain landslides and extreme heat and winter temperatures.
We can call our economic policy to be effective only if it helps us solve the above-mentioned problems.
Sabka Saath, but not necessarily Sabka Vikas
The current budget lists 130 central schemes with outlay exceeding INR 1,000 crores for 2023-24, with 74 of these schemes not spending the budgeted amount. The number of schemes under-spending the budgeted amount for fiscal 2019-20 was 41 out of 112, i.e., 36.6% against 56.9% of the current year.
While the number of schemes is consistent with ‘sabka saath’,the under-spending is not consistent with ‘sabka vikas’. The schemes with the largest below-budget spending are in areas like education, health, nutrition, housing, welfare of disadvantaged communities, rural and urban development, agriculture, etc., i.e., in areas of critical importance from economic as well as social perspective.
Poor Budgeting or not recognising the challenge?
We do have schemes where the spending is far in excess of the budget, e.g., MNREGA, nutrient-based subsidy, and free food schemes, which reflects the need for spending but the government's inability or unwillingness to recognise that need. In all these cases, the budgeted amount during 2023-24 was far less than the actual expenditure during 2022-23.
The current year's budget allocations indicate that the government either does not see the need for additional spending or it will once more exceed the budget and taking away resources from other critical areas.
Non-specific purpose, but specific amount of budget provision under the Department of Economic Affairs
The interim budget 2024-25 had parked INR Rs. 70,448.63 crores under New Schemes in the Department of Economic Affairs. The final budget has scaled down the amount to Rs. 62,592.88. Neither the interim budget nor the final budget has described the purpose of this provision. Earlier such provisions were much smaller (Rs. 3,000 to Rs. 4,000 crores) in budgets from 2018 to 2020.
The Demand for Grants document lists the expenditure as "Capital Outlay on Other General Economic Services, Major Head 5475". CGA’s Chart of Accounts lists that the head is meant for the following expenses.
Is it possible that Bihar and Andhra Pradesh financial support is provided for under this head?
Where is support for Bihar and AP coming from?
The finance minister suggested that the budget allocation for Bihar and Andhra Pradesh is meant for the development of Eastern Region. How does one classify Andhra Pradesh to be in East, when it borders with Chennai in Tamil Nadu – Nellore, Chittoor and Tirupathi are less than 200 kms away from Chennai by road?
Geography aside, the headline allocation to Bihar and Andra Pradesh are capital allocations that may get spent over next few years. In fact, some of them are old projects. For example, the Vizag Chennai Corridor was approved by ADB in April 2016. It seems that the Pirpainti Thermal power project too is an expansion project of a 1320 MW joint venture between NHPC and BSPGCL, with an agreement signed in 2014.
Centre's capital expenditure plan does not have any reference to these projects.
The speech does, however, mention that the central government "will facilitate special financial support through multilateral development agencies". If this is the case, the opposition parties do not have to worry that their states are being discriminated against.
Capital gains taxation
The finance minister has demonstrated tremendous courage by raising the tax rate on long-term as well as short-term capital gains. Capital gains constitute a significant share of household and company earnings (Table 2, below).
While we don't have any formally published data on taxes collected on capital gains, the Finance Secretary mentioned the amount to be Rs. 15,000 crores – a tidy sum that matters for the government too.
A deeper dive suggests that the biggest share of capital gains accrues in the high-income bracket and the long-term capital gains have grown at a much faster pace (Table 3) below.
Given the size of average gains, it is very likely that the long-term gains are accruing from sale of property or ESOP or stock grants for employees in large Indian and global firms, people who can afford to pay a fair share of taxes on their income.
As for the short-term gains, they are likely to have come from investment in financial assets. If these gains are from speculative investment in capital markets, it is only fair that they are taxed at slab rates applicable to each group. There is neither any need for a concession nor a penalty. If we do want to discourage speculative activity, there are better ways, e.g., raising margins for lending and raise the securities transactions tax.
The move to remove indexation is a meaningless move. It will discourage people from selling their physical assets and will encourage cash-based transactions for sure.
On one hand, the government claims that it wants to eliminate cash from the economy and on the other it brings in a provision that will just do that. If the government is really serious about eliminating black money from real estate, it must continue with indexation and work with the state governments to bring circle rates close to market rates and manage land price escalation, which where the maximum amount of cash transactions take place.
Given the stock market’s reaction on Tuesday, it is likely that the government will rethink the indexation aspect. It can raise the same amount of revenue by taxing the gains at a higher rate and making gains eligible for long-term rates only if the assets are held for five or seven years.
Employment Linked Schemes: Are they solving the employment level or the quality of employment problem or none?
Based on the description provided in the budget document, it is hard to believe that the schemes will solve the employment problem. For example, Scheme A pays Rs. 15,000 per annum, in three instalments, to an employee who retains his or her job for 12 months and undergoes a compulsory online Financial Literacy course.
Why do we need to provide financial support to someone who has just got a job and why do we force financial literacy programme to people who are likely to have not more than the basic level of education?
Another question is:
Which trades or professions does an employee take for a year to be fully productive? If it does, should we not invest in accelerating capability building and not throw money for improving financial literacy?
Also, what is the rationale of fixing the upper limit of one lakh per month?
The document claims that it will help one crore persons per annum. How would that happen when the Survey mentions that we need only about 80 lakh jobs per year?
Are we creating an administrative nightmare or an opportunity to steal as all the schemes have provisions for withdrawal of subsidy or thresholds for eligibility?
I also notice an obsession with having EPF enrolment. Why do we need to do that for low-income employees? Why not just the ESI enrolment so that these families get a healthcare coverage too?
Finally, how likely is it that the employers will create additional jobs for subsidies that range from Rs 3,000 to Rs Rs 36,000 per year?
Education and skilling programmes
It is indeed important that we invest in education and skilling and all this investment must come in the public sector so that the youth from rural and urban poor and low-income families can build capability to contribute to value-adding economic activity and not end up being housekeepers or security guards.
We don’t have five years to upgrade our it is, if we want to benefit from demographic dividend. It should have happened at least a decade ago, if not earlier.
It is also important that we invest in improving the quality of education in higher education at all levels. Even IITs, IIMs, AIIMS, etc. must gear up for dealing with technology and climate related challenges.
We cannot have teachers on contract for life, inadequate or poor-quality infrastructure, poor quality libraries and backward-looking curriculum and hope to become a developed country by 2047.
Internship programme
The internship programme is a good idea, but do the large Indian companies need the number of interns that we expect them to hire – additional 4,000 per company per year, if we need to train one crore youth in five years at Top 500 companies? Do these companies have the management bandwidth to deal with such a programme?
It is not that these companies are not hiring interns. The scheme will benefit the economy only if they hire an additional 4,000 people per year and we are able to absorb them in the regular workforce.
In summary, the employment-linked incentives and apprenticeship programmes are at best a set of lazy solutions. The government is hoping that the private sector will solve the problem with financial incentives. If the private sector did have the need and interest in solving the employment problem, the problem would not have existed. Government investment through provision of public sector services in education and skill development is the only long-term solution.
FM’s assertion about meeting everyone's aspirations
In hey July 23 speech, the FM mentioned the following:
"We are determined to ensure that all Indians, regardless of religion, caste, gender and age, make substantial progress in realising their life goals and aspirations."
The budget numbers do not support her assertion, as the level of resource mobilisation at 14.77% of GDP is lower than the last year (15.04%), as the government has chosen to lower the fiscal deficit and only marginally raise the level of tax revenue. But for an increase in non-tax revenue, the resource mobilisation would have been even lower. It has also scaled down its projections about nominal growth of GDP from 11.0% in the interim budget to 10.5%.
We just hope that the private sector is able to do the heavy lifting through increased capex, which is dependent on the growth in household earnings, consumption, savings and investment.
To sum up, in Amrit Kaal, we have truly entered the Kartavya Kaal, as envisaged by the finance minister in her interim budget speech.
