A Budget To Boost Consumption By Winning Over the Salaried Class

Finance Minister, Nirmala Sitharaman, rose to present her 8^th Budget, on 1^st Feb, against the background of a volatile global economy & likely lower global growth in the medium term. There has also been a domestic growth slowdown with the growth rates for FY 25 veering towards 6.4% & firms, in India, complaining of an urban consumption weakness.  Election of “Tariff Trump” as POTUS (President of the United States) & the consequent weakening of the INR – despite RBI’s intervention & depletion of over $50 billion of Reserves - were the other challenges, government of India (GOI) had to grapple with. They had to address the political undercurrent of “victimization” too among the “Middle Class” – largely the salaried ones – which form the core base of the ruling BJP - increasing believing that while the poor get subsidies & the rich tax breaks, bank write offs & concessional Long Term Capital gains - lower than their income tax slabs – while the Middle Class has been left in the lurch. And, finally, fulfil the demands of its BJP party machinery & allies to win the impending state elections in Delhi immediately & Bihar by the year end.

GOI had to respond with a measured action, even while maintaining its reputation of fiscal prudence. Last year, the FM promised a fiscal deficit (FD) glide path of 4.5% in FY26 against 5.6% in FY24 & 4.8% for FY25. FD for FY 26 is proposed at 4.4% with nominal growth predicted at 10.1% against 9.7% for FY25.

Keen to wrest the Delhi state from AAP in the impending state elections, scheduled for 5^th Feb, the GOI attempted to achieve both the Policy & Party ask by announcing Nil taxation for incomes up to 12 Lakhs (12.75 Lakhs along with Standard Deduction) lakhs against 7 lakhs earlier. The revenue foregone – 1 Lakh cr. (~2% of the total Expenditure of 50.65 L cr.). One fundamental question raised by the former Head of the PM Economic Advisory Committee Rathin Roy: If Indian GDP per capita is under INR 2 Lakhs, does it make sense to offer Nil tax for 6X that number?

So, what are the Alternatives?

Instead of the reduction in Direct taxes, GOI could have done the following:

1.       Income tax relief benefits around 1 cr. people while a reduction in GST could have benefitted more of the 140crore people. The Centre could have nudged the states too to contribute to the GST drop. That they took the route that they did, clearly was timed for the Delhi elections.

2.       Drop in petrol / diesel rates too was an alternative – although – meddling with market determined rates needing subsidies thereof is always counterproductive.

3.       The Chief Economic Advisor has alluded to the increasing profitability of corporates & therefore the need to increase wages for greater equity.  Firms have taken a stance that rise in wages should not be linked with profitability as they need to raise salaries / wages even when the going is tough. Furthermore, higher profitability was used to pay off debts to banks thereby addressing the “twin balance sheet” problems. The govt. could have nudged a wage rise in farming by increasing the MNREGA rates or by increasing the minimum industrial wage rate. They kept the Industrial lobby happy too by not announcing the same.

4.       On increasing revenues, the govt. had an alternative either to implement a “Tobin tax” – tax those exiting India or increasing the Capital Gains tax or introducing Estate / Inheritance tax. They stayed away from same not to roil the stock market further. Governments of all hues are likely to resist such a temptation fearing the loss of electoral funding.

What then is the game plan of GOI?

While AAP announced free medical treatment, in both Govt. & Private hospitals, for senior citizens, the central govt. announced enhancement of the limit for Tax deduction on Interest from INR 50,000 to INR 1 Lakh for the same segment of the population – albeit spread across the country.

India is facing a structural challenge of Net Household (HH) savings rate dropping to 5.3% a multi decadal low. It is possible that a part of this 1 L cr. – coupled with its multiplier effect, which the former Chief Economic Advisor, KV Subramanian, estimates as 5X - could boost the savings rate, while another part could land up into the stock market or drive consumption, hopefully, driving the virtuous cycle of investment & job creation. 

The 8^th Pay commission, appointed by GOI, on 16^th Jan 2025, with its report expected by the calendar year end & likely implementation next year has the potential to extend the consumption cycle further; if past history is any guide, we should expect a substantial outperformance of sectors like Consumer Durables next year.

It is possible that the new RBI governor will be nudged to announce a Rate cut soon. 

Specific thrust areas & schemes announced by GOI:

1.       Agriculture: Increase in credit limit from 3 lakhs to 5 lakhs, under the Modified Interest Subvention scheme for the 7.7 cr. beneficiaries including farmers, fishermen & Dairy farmers

2.       MSME: Increase in investment & turnover limits for MSMEs & credit guarantee cover thereof – as 1 cr. registered MSMEs, employing 7.5 cr. people, account for 36% of manufacturing & 45% of exports.

3.       Exports: Focus Product Scheme for Leather & Footwear sectors & attempts to make India a global hub for toys. Exemption of Basic customs duty (BCD) on wet blue leather to facilitate domestic value addition & job creation & crust leather from 20% Export duty announced.

4.       Startups: Looking at the success of the INR 10,000 crore GOI contribution, to a Fund of funds set up in 2014, receiving 91000 crores in commitments received by AIFs for startups, a new fund of fund of INR 10,000 cr. being set up for startups.

5.       R&D: 20K cr. for implementing the private sector led Research, development & Innovation initiatives.

 There is a plan to establish 50,000 Atal Tinkering, over the next 5 years, in schools to inspire the spirit of scientific temper, curiosity & innovation. Also announced were plans to Increase Medical seats by 75,000 over the next 5 years & 6500 seats in 5 IITs set up after 2014. As the no. of govt. jobs keep shrinking & with Large Private corporates showing a greater proclivity for high capex & automation jobs, leading to only a marginal job creation, GOI appears keen to focus on the following for job creation

·         MSMEs

·         Nudge school students towards creativity, higher technical education & then ride the “Startup’ ecosystem to create jobs rather than be a job seeker.

·         Provide a safety net where the principals don’t. As an example, provide benefits under PM Jan Arogya Yogana on registration in the e-Shram portal for the 1 crore gig workers.

The other key takeaways from the Budget

·         Increasing the FDI limit in Insurance from 74% to 100% for those companies that invest their entire premium in India.  While the entry of new global players into the already crowded Indian insurance space is welcome as Insurance penetration stands at 3% only, the immediate stock market reaction was a drop in share prices of listed Insurance players. Was it a reaction to the possibility of increased competition leading to a likely possibility of a drop in earnings or unhappiness at the govt. announcing zero taxation up to 12 lakhs, which allows employees to decide on where to park their savings, unlike the earlier budget announcements of carving out tax breaks for specific investments in Insurance products - (Max of INR 1 Lakh as Health Insurance Premium under Section 80D)?

·         Drop in Petroleum subsidy led to a drop in Oil Marketing Companies share prices.

·         Mission for Aatmanirbharta in pulses & govt promise to procure Urad, Tur Masoor Dal, over the next 4 years from farmers who sign agreements with NAFED & NCCF. This appears to be an attempt to partially address the demand for procurement at MSP by farmers as well as a trial ballon to test the reintroduction of the now withdrawn farm laws.

·         Promise to bring in a framework for sustainable fishing with a specific emphasis on Andaman & Nicobar plus Lakshadweep islands is, perhaps, as much an attempt to increase exports from the current INR 60,000 crore as to use these fishing vessels to protect our strategic interests in the neighbourhood. They could be weaponized as China has done in the South China Sea.

·         Development of 100 GW of Nuclear Power by 2047 with an active participation by the private sector. A Nuclear Energy Mission, for R&D on Small Modular Reactors, with an outlay of 20,000 crore to be set up. This helps expand our renewable energy basket & aids Indian energy security. 

 The Criticisms:

The opposition rapped the Finance-Minister for being kind only on Bihar – with many a largess announced like the establishment of a Makana Board, NIFTEM (National Institute of Food technology Entrepreneurship & Management), enhancement of hostel & other infra at IIT Patna & Patna Airport & setting up a new brownfield airport at Bihta, financial support for the West Koshi canal – during the course of her budget speech. The State goes to the polls by the end of the Calander year.

Replacement of some lowered basic customs tariffs with cess, is in effect stealing what ought to have been legitimately transferred to the states as a matter of right, under the divisible tax pool. Cess collected remains with the centre. 

Growth in capex from the RE of 10.18L cr. for FY 25 to 11.21 L crore for FY 26 (growth of 10.1% similar to the expected nominal GDP growth rate) is unlike the humungous growth rates clocked in FY 23 & FY 24 leading Feedback ventures' Vinayak Chatterjee to question if the govt has moved away from “Capex/Investment led growth model” to a “Consumption led” one. Clearly, GOI has maxed its execution capacity & sane to expect capex growth to merely trend closer to the nominal GDP growth rates henceforth; capex to GDP ratio may stabilize around the 3% mark. The budget expressed an intention to ride the PPP model for which implementation of the Kelkar committee recommendations is essential.

Conclusion:

The budget has the imprint of Modi’s fine political mind. Despite the announcement of a concessional corporate tax of 15%, in 2019, to boost Manufacturing, it still stagnates, unfortunately, at around 15% of GDP against the aim of touching 25% under “Make in India” for the world. Ironically, Personal Income Tax collections have been higher than the corporate tax collections, over the last few years, inviting criticism from the opposition & prompting the salaried class to start believing in the narrative of a “Suit Boot ki Sarkar". The government must have felt a need to erase such a narrative which they did by making the income tax up to the 12 Lakh salary slab zero. While boosting consumption & invigorating the investment & job climate is the headline, winning the Delhi state elections too & finishing off the AAP appears to be the other political objective. Time will tell if the govt. has achieved its twin objectives.