Interim Budget 2024: Navigating the crossroads

Interim Budget 2024: Navigating the crossroads

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As finance minister Nirmala Sitharaman gears up to present the vote-on-account budget for fiscal year 2024-25 (FY25) on 1 February, India’s economy finds itself at a crucial juncture. The mix of current macroeconomic indicators presents both opportunities and challenges for the finance minister.

On the bright side, growth projections are promising. The National Statistical Office’s (NSO) advance GDP estimates and the Reserve Bank of India’s (RBI) forecasts suggest a robust real growth rate of 7-7.3% in FY24. This optimistic outlook provides Sitharaman with greater flexibility in crafting the budget’s revenue and expenditure figures. However, balancing this with expectations of a populist budget in an election year will be a delicate task. With the government seeking a third term, increased welfare spending, particularly on programmes for women, the poor, farmers, youth, and tribals, is anticipated.

The twin deficit numbers also offer reassurance. Goldman Sachs has lowered its forecast for India’s current account deficit (CAD) to 1.3% of GDP, thanks to rising service exports and declining oil prices. Additionally, increased revenue from both direct and indirect taxes should comfortably meet the projected fiscal deficit of 5.9% of GDP. In the current fiscal year’s first eight months, the average monthly receipts from goods and services tax (GST), corporate tax, and personal income tax have significantly exceeded last year’s figures.

Conversely, recent industrial production and inflation data signal potential economic challenges. The latest Index of Industrial Production (IIP) numbers revealed a steep decline in 17 of 23 manufacturing industries. Negative growth in sectors like consumer durables, non-durables, and capital goods, indicative of shrinking demand in both rural and urban areas, presents considerable fiscal planning obstacles.

Notably, India’s retail inflation hit a four-month high of 5.7% in December 2023, driven by a 9.5% increase in food prices. With inflation surpassing the RBI’s threshold of 6% in as many as seven major states, addressing these issues in the budget is critical.

While minister Sitharaman has indicated the interim budget won’t feature extraordinary announcements, it must tackle these emerging macroeconomic concerns, balancing economic needs with political realities.

Firstly, the significant drop in industrial production growth underscores the urgent need for demand-side measures to revitalize the industrial sector. Particularly in rural areas, where demand has been weak since the pandemic, negatively impacting sectors like FMCG, automobiles, and housing. FMCG sales in rural centres fell 9.6% year-on-year (YoY) in November, while average work demanded under the rural job scheme during October-November was 26-31% higher than the pre-pandemic period, both indicating growing rural stress.

The budget should propose initiatives to boost rural incomes and enhance access to institutional rural credit, vital for small and marginal farmers.

Secondly, in light of escalating headline and food inflation, the budget should support RBI’s monetary policies and address the economy’s supply-side issues. Reallocation of funds within the agriculture sector is necessary to improve long-term productivity, similar to manufacturing’s PLI (production-linked incentives) schemes. Production and employment-linked schemes in the agriculture sector can mitigate food price volatility and ensure long-term price stability. Additionally, targeted tax incentives might be required to protect household purchasing power amid rising inflation.

Thirdly, while positive GDP growth forecasts are encouraging, sustaining this momentum necessitates fiscal support for sectors that are likely to be new growth drivers of the economy. The finance minister should focus on investments and incentives in areas like renewable energy, fintech, electric vehicles, healthcare, biotechnology, and artificial intelligence, to stimulate innovation, job creation, and growth.

Fourth, the budget should aim to improve credit availability and access to working capital for the for the micro, small, and medium enterprise (MSME) sector, vital for India’s exports. Enhancing infrastructure in roads, ports, and logistics is also crucial to strengthen India’s economic resilience amid global uncertainties.

Lastly, as India prepares to join the JPMorgan and Bloomberg emerging market indices in 2024, maintaining a cautious fiscal approach is imperative. Foreign investors and rating agencies will closely watch the government’s commitment to reducing the deficit below 4.5% of GDP in the next two years. An overly populist budget could undermine India’s fiscal consolidation efforts post-pandemic and affect its global economic standing.

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