A coalition government's blueprint for growth
This was the first budget of the government led by Prime Minister Modi in his third term. It has laid the contours for Modi 3.0 economic policies, which also need approval from the NDA allies. It was Finance Minister Nirmala Sitharaman’s record seventh presentation. Even though the budget proposals will apply only for six months before a new one is presented next year, they articulate the government’s economic vision. The emphasis is clearly on job creation, skilling and training, apprenticeships for youth, and encouraging small businesses. Additionally, it also addresses India’s energy challenge as it transitions from coal and fossil fuels to greener, more sustainable energy sources. Hence, the mention of nuclear power with a public-private partnership is important, as is the policy of stored water energy.
The major thrust of the Union Budget proposal for 2024-2025 is on job creation and supporting small businesses. Job creation is encouraged through employment and skilling incentives, while small businesses benefit from collateral-free loans and access to export markets. There is also an increase in tax on capital gains. In some ways, this can be read as a pivot towards labour-intensive growth, which includes the enhancement of human capital. In recent years, the Union government has consciously increased the share of spending on infrastructure such as roads and airports. These hard assets have been created at a rapid pace and are visible. Public spending on infrastructure has been a significant growth driver, but job creation has not kept pace, and rural wages have stagnated. Small businesses, which generate jobs, have struggled. The micro reality has been that consumer spending is growing slower than GDP, which is concerning. Instead of only providing incentives to production and revenues, the government is now focusing on job creation and providing incentives for job creation.
India needs to invest massively in human capital for long-term, sustainable, and inclusive growth. That investment needs to reach a benchmark of 6% of the GDP, which is twice its current level. This investment will come both from private and public resources. Public funds are necessary for funding primary education and partly secondary education. This is because of tremendous social spillover benefits that go far. But college education and beyond, including skilling and training, cannot be funded by taxpayers as the benefits of higher education and skills accrue largely to the individual and only secondarily to society at large. The spillover benefits of skilling and college degrees and diplomas are in terms of entrepreneurship, innovation, and job creation, but are still not a strong justification to provide it all free. The key challenge for skilling India is that the vast majority of the youth hungry to be trained cannot afford the true cost of quality education. Also, most of the skilling happens as on-the-job learning. Hence the best way is to incorporate it into a national apprenticeship programme, which has portable accreditation. Even the internships for 10 million youth in top-tier companies will be a step towards learning by doing. The fee for skilling and higher education should be borne by the student, the primary beneficiary. It is here that the Budget does well in ensuring easy and inexpensive access to student loans. In the coming years, this should be a dominant way of funding higher education in India. Similarly, collateral-free loan schemes have been announced for small businesses, apart from government-provided credit guarantees. The small businesses have also been helped in linkage via e-commerce to export markets. Since micro, small, and medium enterprises provide the lion’s share of value-add in industry, exports, and employment, this focus
is welcome.
Beyond jobs, skilling, and MSMEs, the prominent macrofeature is fiscal responsibility. The finance minister chose to use half of the fiscal bonanza received from the Reserve Bank of India to reduce the deficit, demonstrating a commendable commitment to fiscal consolidation. India is an outlier when it comes to debt servicing (one-third of tax revenues going to meet interest expenses); hence, keeping fiscal promises and prudence is very important. If anything, the assumptions about next year’s tax revenues look conservative. India needs a comprehensive re-look at its income tax strategy. The direct tax net needs to be much wider, and the slabs should not go from zero to the top rate within a span of just a few lakh rupees. The top tier must kick in at high incomes, say above one crore. But exemptions must go. A new comprehensive economic framework for next-gen reforms is forthcoming, as the finance minister said.
The new framework for reforms must position India in an advantageous position to exploit global value chains. Hence the trend should be to lower import duties across the board. The import duty on gold was cut from 15% to 6% to prevent duty leakage via the route of duty-free imports from the United Arab Emirates into Gujarat International Finance Tech-City (GIFT City). Besides, high duties on precious metals are eventually counterproductive since they invite smuggling. It was also good to hear about future-looking initiatives such as promoting private-public partnerships in small modular nuclear reactors and on the space economy. And also a hard, realistic assessment of India’s difficult transition path away from fossil fuels.
The higher taxes on capital gains might be temporary spoilers for the stock markets. But India’s macro performance stands out in the world for its resilience and high growth, with moderate inflation. With policies to incentivise job creation and skilling, along with fiscal consolidation, there is no reason why high growth cannot be sustained. Sooner or later, the financial markets will acknowledge this strength.
(The writer is a Pune-based economist)
(Syndicate: The Billion Press)