Budget 2024: Right balance between economic growth and fiscal prudence

Budget 2024, has taken a balanced approach and has well charted the course for transforming India into ‘Viksit Bharat’ by 2047 in the ‘Amrit Kaal’ with sustained efforts and special focus areas on Poor, Women, Youth and Farmer and on nine priority areas: Productivity and Resilience in Agriculture; Employment & Skilling; Inclusive Human Resource Development and Social Justice; Manufacturing & Services; Urban Development; Energy Security; Infrastructure; Innovation, Research & Development and Next Generation Reforms.

The Budget 2024 places a special emphasis on education, employment generation and skill development recognising these as crucial components for sustainable economic growth and social welfare. The key initiatives around this include various skilling programs as well as upgradation of existing Industrial training institutes. Further, financial support in the form of educational loans and annual interest subvention solidifies the endeavor to encourage upskilling amongst the youth.

The Finance Minister gave a significant impetus to the MSME sector to enable them to grow and compete on the global stage. Introduction of the Credit guarantee scheme for MSMEs in manufacturing sector, enhancement of MUDRA loans and the introduction of e-commerce hubs under the PPP model will boost revenue as well as fuel employment generation. In a welcome move public sector banks have now been tasked to build in-house capabilities to assess the MSME credit based on their digital footprint in the economy, rather than traditional modes of assessing based on assets and turnover criteria.

Realising the importance of innovation in economy, it is proposed that the Government will come up with an economic policy framework that would steer next-generation reforms aimed at speeding up the economic expansion. The Government also proposes to provide appropriate fiscal support for land reforms over the next three years. This will include assignment of unique identification numbers to rural lands and establish a new land registry that will be linked to a farmer registry to help credit flow and digitization of land records in urban areas.

Recognising the advancements in space sector, setting up of a VC fund of INR 1,000 crores to specifically focus on space economy is another welcome move. Additionally, Government will also focus on the development of spiritual tourism as well as revival of cultural and scenic heritage which provides a boost to culture and identity of India along with providing the impetus to associated economic activities.

Empowering women has always been the focus of the Government. This Budget announced several reforms for women ranging from establishing women working hostels, allocating INR 3 Lakh crores for schemes benefitting women and encouraging states to reduce stamp duty for properties purchased by women.

On the tax front, the Budget saw a special focus on ‘Ease of Doing Business’ in India with direct tax announcements focusing on comprehensive review of income tax act to make it concise and lucid, announcement of amnesty scheme ‘Vivad Se Vishwas 2024’, faster disposal of ongoing litigations, limited reopening of reassessments, additional incentives to IFSCs, reduced rate of corporate tax for foreign companies, withdrawal of 2% equalisation levy, expanding the scope of safe harbour rules, simplification of Foreign Direct Investment rules to ensure healthy foreign inflows in the country and simplification of Outbound Investment rules to promote INR usage etc. Overall, simplification of the overall tax code is a step in the right direction and the next budget in six months’ time will present an opportunity to make tweaks and define the tax code more prudently.

In a significant move to augment the startup ecosystem, promote employment and investment opportunities, ANGEL tax is proposed to be abolished for all classes of investors.

Measures such as relaxing personal income taxes and increase in standard deduction under the new individual tax regime would enhance disposable income for mid salaried employees. However, increased rate of LTCG coupled with STT rate increase, taxation of buy back for recipients, removal of indexation benefit could potentially hurt sentiments of the earners in financial markets in short term. It would be interesting to see how LTCG and STCG rates would evolve in the future budgets.

A few key tax expectations which still did not find mention in the Budget is the implementation of the OECD’s BEPS 2.0 - Global Minimum Tax (or GLoBE rules) in India and timelines for its enactment as well as extension of the sunset date for new manufacturing companies.

On the Indirect tax front, Customs and GST reforms focus on simplification and rationalisation of rates to facilitate domestic manufacturing, promote exports, reduction in prices for cancer drugs, removal of duty inversions and reduction of disputes.

Government has maintained a well-balanced stance on fiscal consolidation with fiscal deficit target reducing to 4.9 per cent from 5.1 per cent in the interim budget. This is further expected to lower in next budget. For the consumption and employment engine to run faster and considering Government’s target to make India the third largest economy by 2030 fiscal deficit of around 5 per cent may remain the norm for next few years and is critical to provide the necessary impetus to the economy.

While there are a lot of initiatives focusing on employment generation and skill development, it will be interesting to see how these initiatives will integrate and leverage AI and emerging technologies into the Indian economy. Change is the only constant for a country with high growth aspirations, this budget is laden with multitude of policy changes and most of them in the positive direction to boost economy. Its success, will however, hinge on the effective implementation and collaborative efforts of the central government, state government and the private sector. If executed well, this Budget has the potential to propel India towards a prosperous and equitable future. To conclude, the Finance Minister in her unprecedented seventh straight budget presentation has to be commended for striking the right balance between fostering economic growth and at the same time maintaining fiscal prudence.

A version of this article was published in Business Standard dated July 24 2024.