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Informist, Tuesday, Jul 23, 2024

 

By Shubham Rana

 

NEW DELHI – Faced with an electoral backlash, Finance Minister Nirmala Sitharaman today tried to address some of the biggest criticism faced by the Narendra Modi government – joblessness and crisis in the unorganised sector – while staying focussed on fiscal consolidation.

 

In the full Budget for 2024-25 (Apr-Mar), Sitharaman announced a package for micro, small and medium enterprises and a slew of measures to encourage the private sector to hire again, even as she lowered the fiscal deficit target more than expected to 4.9% of GDP.

 

"Faced by a trade-off between fiscal consolidation and expectations for measures to boost demand, the 2024-25 Budget struck a fine balance by continuing to consolidate finances while also tackling social sector demands, with a focus on saving over spending," Radhika Rao, senior economist at DBS Bank, said in a note.

 

The government used the additional funds from the Reserve Bank of India's surplus to lower the fiscal deficit target and increase revenue spending, while allocation for capital expenditure remained unchanged at the level of the Interim Budget.

 

Perhaps the most high-profile expectation from the Budget was that of an income tax cut. While Sitharaman stopped short of announcing an outright income tax cut, she raised the standard deduction limit by 25,000 rupees to 75,000 rupees in the new tax regime and tweaked the tax slabs under the new income tax regime, giving a tax benefit of up to 17,500 rupees per year.

 

The Budget also balanced fiscal priorities with political ones. Bihar and Andhra Pradesh, both governed by key allies of the Bharatiya Janata Party, received generous allocations in the Budget. Sitharaman announced a 150-bln-rupee special financial assistance for Andhra Pradesh through multilateral agencies to facilitate the state's development plan for a new capital.

 

Financial support for Bihar, on the other hand, was announced through several infrastructure-related packages.

 

While there were expectations that the result of the General Elections, due to which the BJP had to rely on its allies in the National Democratic Alliance to form a government, could have pushed the ruling party to announce some populist measures, this was not the case.

 

TACKLING CRITICISM

One of the government's biggest points of criticism and challenges has been job creation. Political analysts have cited this as one of the main reasons why the BJP failed to get a majority on its own in this year's elections.

 

From providing internship opportunities at the top 500 companies to employment-linked incentives, Sitharaman announced various new schemes that focus on employment-generation and skilling of the workforce. Creating more jobs will also help the government address another challenge – tepid consumption growth in the country.

 

"Measures like the change in the income tax slabs and the direct benefit transfer to first-time workers are likely to spur consumption, particularly for small-ticket items," HDFC Bank said in a research report.

 

The Budget also focused on micro, small and medium enterprises. Sitharaman said the government would introduce a credit guarantee scheme to facilitate term loans to MSMEs for purchase of machinery and equipment without collateral. She also announced a new mechanism to facilitate continuation of bank credit to MSMEs during their stress period with a government-promoted fund providing guarantees to MSMEs when their accounts are tagged as special mention accounts.

 

DISAPPOINTMENTS

While Sitharaman lowered the tax burden on individuals, some other measures took the financial markets by surprise. The equity market was caught off guard by the announcement of a hike in capital gains tax. The Budget proposed to hike the short-term capital gains on certain financial assets to 20% from 10%, and proposed a uniform tax of 12.5% on long-term gains on all financial and non-financial assets.

 

It also proposed to hike the securities transaction tax on futures and options trades from Oct 1. The securities transaction tax will be hiked to 0.1% of the options premium on sale of options, and to 0.02% of the price of futures on sale of futures in securities.

 

In a knee-jerk reaction to the higher tax, benchmark equity indices fell 0.6% today, though they later recovered to end 0.1% lower.

 

The capital gains tax also hurt the Indian currency, which fell to a record low of 83.7125 against the dollar during the day and ended at a record closing low of 83.6875 per dollar.

 

The bond market was also left wanting for more, as the cut in the government's market borrowing was lower than expected. The gross market borrowing for the year was pegged at 14.01 trln rupees, against market expectations of 13.81 trln rupees. The Interim Budget had set the market borrowing target at 14.13 trln rupees.

 

After years of putting all her eggs in the capital expenditure basket, Sitharaman has finally attempted to fix the big plot hole in India's growth story, making its world-beating growth more inclusive.  End

 

Edited by Avishek Dutta

 

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