Nirmala to India Inc: Invest more, we have done our bit

Budget provides a stark reminder that the economy is in a slowdown. Deviation of the revised estimates of critical parameters from budget estimates provided just six months ago is quite striking. Revised estimates of corporation tax are significantly lower than was estimated in July, as are Union excise duties. A similar trend is seen in non-tax revenue as well. This reality is no doubt the basis for FM’s emphasis on initiatives needed to develop the rural economy, encourage small and medium enterprises, step up investment, and boost exports. What is less evident is the government strategy to kickstart these engines of growth. Budget makes it quite clear that growth through state investment is not on the cards. GOI is quite proud of overall rates of inflation and has chosen to keep the fiscal deficit down despite pressures on its finances. It has ensured that revised estimates of fiscal deficit are lower than the current year’s budget estimates and it proposes a further reduction in 2025-26. Such a tight budgetary strategy has had its effects on capital expenditures. Revised estimate of effective capital expenditure for 2024-25 is over Rs 1.83L cr lower than budget estimate for the year. ShowQuotesThis commitment on fiscal deficit has also taken its toll on some of the much publicised schemes of govt. For example, though the government has laid a great deal of emphasis on housing through Pradhan Mantri Awas Yojna, revised estimates for its rural and urban versions taken together are around 45% lower than budget estimates for the current year. The National Rural Drinking Water Mission has fared even worse, with revised estimates being just around a third of budget estimates. Budget does promise to step up investment in both these missions in 2025-26, but whether it is able to do so would depend on its ability to revive growth. With the government not willing to lead the revival in expenditure, the onus to revive demand falls on private consumption. Budget seeks to encourage this process through what has been presented as a substantial cut in income tax. But the effect of this cut on demand must be seen in context. A part of the burden of a decline in corporation tax between budget estimates and revised estimates for the current year has been made up by an increase in income tax collection of 5.9%. Budget expects income tax collection in 2025-26 to go up by 14.4% despite the FM announcing a cut in the rates. GOI no doubt expects some of this increase to come from buoyancy in income tax due to a revival of growth. There may also be some fine print in the income tax proposals that contribute to government optimism. With some uncertainty about private consumption boosting demand, much depends on the FM’s efforts to spur the engines of growth. Budget speech points to a long overdue recognition that the slowdown may not just be cyclical but have a structural dimension to it. ShowQuotesIt is particularly interesting to see the FM state as one of her objectives the need to ensure that while migration remains an option, it is not a necessity. The current pattern of a large number of workers migrating without their families to carry out short-term assignments in distant cities has serious costs. Apart from the monetary costs of this form of long-distance sourcing of workers, there is the effect it has on the quality of life of workers and their families. The speech does provide an exhaustive list of steps towards Viksit Bharat, but this feels like a list of challenges rather than a cohesive strategy. Success of some of the steps could, in fact, hamper the working of others. mediumhttps://www.youtube.com/watch?v=5pmNx_8a11UWould the success of a strategy to reduce the need for migration hurt the availability of construction workers needed for the growth of MSMEs and other manufacturing units? Also, some of the measures have been initiated in the past with less than ideal rates of success. Skill development, in particular, has been a priority area in policy but with very limited impact on practice. Some of these limitations have been due to a continued preference among low and medium skilled workers to prefer informal methods of learning. Budget speech has no pointers to strategies that may have been developed to address such persistent issues.Continuing structural constraints at various levels of the economy perhaps justify government hesitation to adopt a public expenditure-led strategy to revive the economy — as the persistence of structural bottlenecks would only ensure increased public expenditure leads to inflation. Still, is the government’s reliance on income tax cuts alone to revive the economy a victory of hope over experience? Budget is realistic enough to highlight the challenges facing the Indian economy, but it does not offer the initiatives that an economic revival demands. Pani is Dean (Social Sciences), NIAS, Bengaluru