TK Arun

A budget that offers para after para of text laced with some numbers


Budget a disappointment
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The Budget is a disappointment from the perspective of boosting investment and growth but it at least calls for a policy framework that is viable, if that call is answered

Where's the actual allocation or fleshed-out policy that would the reverse economic slowdown that brought this year’s growth down to 6.4 pc?

The media has trained the housewife to say that her expectation from the Budget is that it would lower the price of cooking gas, and the taxpayer, to hope that the personal income tax rate would come down. This year’s budget makes the taxpayer happy, offering her tax cuts that can go up to over one lakh rupees, depending on her income.

Similarly, the garden variety economist has been trained to sagely comment on the soundness of the budget by marking the movement of the gross fiscal deficit, as a proportion of the GDP. By bringing the fiscal deficit down, below the target of 4.5 per cent of GDP for 2024-25, the budget pleases the fiscal-deficit watcher as well – never mind that the US fiscal deficit is 6.5 per cent of GDP and France’s fiscal deficit is also over 6 per cent of GDP.

States offered loans

For those who expect the budget to address the economy’s growth problems, whether temporary or structural, the budget offers paragraph after paragraph of text laced with mentions of large sums of investment money. For those who focus on what the Budget offers state governments, they have been offered ₹1.5 lakh crore of interest-free, 50-year loans for building infrastructure. There is also a challenge fund that can be tapped for up to 25 per cent of the cost of urban projects.

That leaves a small group of hard-to-please analysts who want to see the actual allocation in the Budget or fleshed-out policy that would reverse the growth slowdown in the economy that has brought this year’s growth down to 6.4 per cent and will keep the growth rate in that neighbourhood next year as well.

China racing ahead

China grew at double-digit rates for well over a decade to grow from a low middle-income country to a high middle-income country that is also the world’s second-largest economy, the second-largest military power and a technology superpower that promises to be second to none in the not-too-distant future. India, too, used to see double-digit growth as being in reach. Now, the talk is of attaining a growth rate of 7 per cent.

And that, too, depends on revival of the much-reviled public-private-partnership model of infrastructure investment, development of detailed projects, a second go at monetization of mature assets, state government enthusiasm for getting farmers, ever ready to go on the warpath, to part with land for new projects, and other pies in the climate-change-racked sky.

Also read: Budget: Sitharaman juggles I-T relief, economic growth with fiscal prudence

Hard facts

Here are the hard numbers. The total size of the 2025-26 Budget is 14.19 per cent of GDP, down from the 14.55 per cent of GDP expected to be achieved in this, concluding, fiscal. In other words, the 0.4 per cent of GDP reduction in the gross fiscal deficit, from 4.8 per cent of GDP this fiscal to 4.4 per cent of GDP in 2025-26, would be achieved by compressing total spending at a time when the economy is slowing and needs a boost from government expenditure.

The tax giveaways for the middle class add up to ₹100,000 crore or 0.2 per cent of GDP. Even if all of that goes into additional consumption, that would not offset the cut in government spending.

Capital spending by the Centre is slated to remain flat, at 3.14 per cent of GDP. Considering that the government actually spent ₹92,000 crore less than it planned in the 2024-25 Budget, there is good reason to expect similar spending shortfalls next year as well.

How to materialise the investment that the economy urgently needs to get back its growth momentum?

Back to PPP projects

The Budget proposes a challenge fund for urban projects, to provide up to a quarter of the funding cost, if a state government were to come up with a viable project. The recent turn in the political economy towards states spending their scarce resources on transfer payments to the citizenry – that sounds so much better than freebies – promises to leave little money for large infrastructure projects.

If neither the Centre nor the states would have money to spare for infrastructure investment – we are discounting investment rhetoric unsupported by hard cash – how is growth to materialise? PPP projects can actually be viable. But that calls for a paradigm shift in policy and politics.

The present regime replaced its predecessor by convincing voters that the UPA was steeped in corruption, that the PPP model itself was a framework for transferring public funds to tycoons. That political narrative will have to be abandoned, and replaced by one that welcomes it.

PPP can be what its critics claim it to be, if not designed properly. Policy will vary from sector to sector. And it has to be worked out in detail. That will take time, expertise and effort.

Also read: Budget | FM retains firm hold on fiscal discipline; ball now in RBI's court?

Need for land, a functioning bond market

Any new project calls for land. Take the towns that urbanising India desperately needs – forget the Budget’s vain hope to keep the rural poor confined to the village with dollops of development strewn over the fields. They need land to be released. Farmers have to buy into the project, agreeing to compensation in the form of a portion of the land they give up being returned as developed, urban land. That calls for politics.

Infrastructure projects need to be financed. That calls for a functioning bond market. India does not have one. The RBI needs to let go of its stranglehold over the government debt market, unify the debt market under Sebi’s regulation, and allow the full range of derivatives to hedge against credit, currency and yield risks. In the absence of such groundwork, it is not investment that would flow from constant cries of PPP.

Also read: Education Budget 2025: Artificial Intelligence, IITs and medical colleges get major boost

Bright spot

The Budget is a disappointment from the perspective of boosting investment and growth. But it at least calls for a policy framework that is viable, if that call is answered. But the Budget disappoints in its treatment of import duties. Instead of levying a small, uniform rate of customs duty, the Budget tinkers with rates and spreads.

Certain duties have been eliminated. This is harmful, as it would rule out the chance of a domestic industry growing in the sector offered zero protection. Scrap, in particular, deserves protection, if recycling of domestic waste material is to make economic sense.

The Budget does have a bright spot. Tax receipts have been growing faster than GDP. Tax collections by the Centre are slated to cross 11.9 per cent of GDP. The taxmen have been doing a good job, even if economic policy has decided to let near-term growth take care of itself.

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not reflect the views of The Federal.)

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