Finance minister Nirmala Sitharaman has presented the union budget for 8th time and a diagnostic report of the economy was presented a day before. Before coming to the budget proposals, it’s important to take a look at the overall economic situation. GDP growth for FY25 is expected to be 6.4 per cent and even for next year it is likely to be range bound between 6.3 per cent-6.8 per cent. Given the global headwinds, the growth rate looks fine but if we aim to become a developed economy by 2047 then we need to grow at 8 per cent for the next decade.
Achieving 8 per cent GDP growth over the next decade would require both higher investment levels and improved investment efficiency. Over the past couple of years the government is shouldering the capital creation but the desired economic impact in terms of infrastructure spend multiplier is not visible. There could be multiple reasons behind the dismal outcome and time and again the government has been saying that it’s time for the private sector to come forward and do its bit. Corporates are sitting on a cash pile after major tax cuts announced in 2019 and there is a fair expectation to pass some of the benefits to the employees which will increase their disposable income, and lead the investment cycle. However, capacity utilization remains ~75 per cent level due to sluggish demand and perhaps this could be a major deterrence for the private capex.
Capital expenditure target for FY26 has been increased to Rs. 11.2 lakh crores which is slightly higher than the previous year. It should be kept in mind that the previous year budget was not fully utilized due to Loksabha and state elections. This time the finance minister chose to prioritise the consumption boost by giving tax relief (under the new taxation regime). The tax cut is expected to impact the tax collection by more than Rs. 1 lakh crore and therefore there was very little scope for further increasing the capital expenditure given that the government looks committed to fiscal discipline and fiscal deficit is targeted at 4.4 per cent of GDP in FY26.
Budget has not stressed on the disinvestment and there were expectations that government led initiatives in cutting edge technologies like artificial intelligence, smart chips etc. shall be announced. It would have been better if the disinvestment proceeds target had been increased and those proceeds would have been provisioned for investment in emerging sectors. No major direct tax announcements have been made keeping in mind that draft of new tax legislation is likely by next week.
Economic survey suggested that India needs to create ~8 million non-farm jobs per year till 2032 that too in the era when automation and artificial intelligence is posing a threat to employment opportunities. Previous economic survey had highlighted that only one out of two college pass-outs is employable. The budget didn’t provide any roadmap to achieve this and it must be emphasized that growth and employment is not the sole responsibility of the union government. In a federal structure like ours where various key elements like land, law & order etc. are within the purview of states, it is imperative for states to create a conducive business environment. Government has announced that the finance, MSME and commerce ministry will work together to increase exports which have been stuck at 10.5 per cent of GDP for quite some time now. Review of ‘Bilateral Investment Treaty (BIT)’ model has also been announced which was amended in 2015 and has been cited as a major deterrent for FDI.
In order to achieve the desired growth and stability, all the participants are expected to do their part effectively. While a lot is being discussed about the role of governments and the private sector, it is time to look into the role played by the central bank (i.e., RBI) as well. It is a well-known fact that the rupee is still overvalued but RBI intervened by way of open market operations to keep the exchange rates high. This is impacting exports and no matter what the government does, we cannot grow on the back of domestic demand alone. Similarly, benchmark interest rates have not been lowered on inflationary concerns and to manage the inflation in accordance with the framework established in 2016. This rigid stance of the RBI is impacting the growth and a serious consideration should be given whether a rate revision would impact the major constituents of the consumer inflation basket. Time and again RBI has taken necessary actions to inject liquidity and it is time to look at the benchmark rates as well.
This budget also reflects the compulsion of coalition politics also. Bihar is poll bound this year and specific sops were announced for the state. Major chunk of the middle class will be happy after the tax slab revision but there is nothing for tier-2 or upper middle class and fiscal instruments used to promote savings have not got any attention. The government talks about trust but extending the time-limit u/s 139(8A) is not well intended because we are seeing how taxpayers are chased even after three years to confirm the deductions claimed in the return.
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