A focus on creating jobs

To an extent, the 2024-25 budget measures were influenced by the general election results. The higher allocations to Bihar and Andhra Pradesh were the most obvious manifestations. However, the other budget priorities, while likely given a bit more urgency post the elections, are based on other unfolding economic trends, many of which have evolved as major concerns over the last few years. 

Underlying this robust outlook on growth lies a rising unease about the distribution of the benefits

The Finance Minister began her speech listing four key themes of the Budget planning: employment, skilling, MSMEs and the middle class. These are then detailed into 9 actionable priorities, which the forward-looking vision plan intends to be drivers of sustained growth.  

On growth and overall economy, the Economic Survey had forecast inflation-adjusted FY24-25 GDP growth at 6.5-7.0% (lower than RBI’s 7.2%). Economic activity remains robust, with industrial activity, manufacturing and service exports, airline traffic, hotel stays and many more remaining robust. Yes, growth in these indicators is slowing, but still remain healthy. The stock markets have crossed historical highs almost every month; despite the stretched valuations, domestic household savings still keep pouring in every month. 

Rural consumption, in particular, has reportedly remained very muted, as is seen in almost stagnant rural wages, adjusted for inflation. Rural inflation remains (much) higher than urban, eating into already lower disposable incomes of rural families

However, underlying this robust outlook on growth lies a rising unease about the distribution of the benefits. While the available data on income and wealth inequality, particularly how they have moved over a period of time, remains scarce and disputed, data from GDP shows that household consumption has been growing slower than the aggregate. 

Rural consumption, in particular, has reportedly remained very muted, as is seen in almost stagnant rural wages, adjusted for inflation. Rural inflation remains (much) higher than urban, eating into already lower disposable incomes of rural families. All of this is despite large and medium sized corporations having large cash holdings. 

On personal income taxes, taxpayers opting for the new regime are reported to have a lower tax liability of Rs 17,500 per annum

The proximate reason for muted consumption demand has been the lack of incremental quality, well paying jobs. Increasingly, as official data shows, larger numbers of additional employment come from “casual labour” or “self-employed” rather than “salaried”. Even amongst the salaried classes, an increasing number are contract workers. None of the categories have pensions or benefits, and remain vulnerable to losing their jobs in economic downturns. 
These are the proximate reasons for the thrust areas of the Budget. 

On personal income taxes, taxpayers opting for the new regime are reported to have a lower tax liability of Rs 17,500 per annum. This will come from (among others) an increased standard deduction from the earlier Rs 50,000 to Rs 75,000 as well as a change in income slab-wise tax rates. This is estimated to benefit 4 crore salaried taxpayers. The hope is that this lower tax liability and the higher disposable incomes will lead to additional spending on consumer goods, adding to sustained growth. 

Regulators are now saying that this huge rush of retail investors is leading to a diversion of household savings from productive investments into speculation

On the other hand, a rising concern over the past 3-4 years has been a flood of money from retail investors in stock markets. In the earlier years of this shift, this flow had largely been through mutual funds, but recently has shifted not just to direct stock investing, but, now a major concern of potential crashes in markets, in the past year or so, into speculative Futures and Options (F&O) derivatives. In fact, regulators are now saying that this huge rush of retail investors is leading to a diversion of household savings from productive investments into speculation. 

A failure of mass level job creation has become the biggest elephant in the room for muted consumption

This has led to a five-fold increase in the Security Transactions Tax on F&O trades from 0.02% to 0.1%, a hike in the Short Term Capital Gains (STCG) tax from 15% to 20% and on Long Term Capital Gains (LTCG) tax from 10% to 12.5%. These changes will result in a net revenue loss of Rs 37,000 crs due to the personal income tax changes and a gain of Rs 30,000 crs via the capital gains tax increases. The Govt also estimates to lose another Rs 8,000 crs with the reductions in indirect taxes on goods. At a very broad level, households stand to net gain only about Rs 15,000 crs in disposable incomes, a very small amount relative to the total private consumption (0.08%). 

The MSME sector (particularly the Micro and Small segments) was another focus area, since it overlaps both the concerns of lagging consumption and a lack of well-paying jobs. Recently released Government data showed 6.5 crores unincorporated enterprises employing 11 crore workers in 2022-23; these comprise the informal sector and will be key to future job creation. 

Other than being hobbled by onerous bureaucratic compliance and regulations, one of the key reasons for these small enterprises not being able to scale up (and integrating into supply chains of medium and large corporates) has been a lack of access to formal credit. Interest rates on loans from money lenders were exorbitant. The action plan in the Budget “formulates a package covering financing, regulatory changes and technology support, to help them grow and compete globally”. 

Other than being hobbled by onerous bureaucratic compliance and regulations, one of the key reasons for these small enterprises not being able to scale up (and integrating into supply chains of medium and large corporates) has been a lack of access to formal credit

A key component is a credit guarantee scheme for manufacturing MSMEs as well as a self-financing guarantee fund. There are other incentives to increase bank loans to this segment (including higher MUDRA loan limits, better working capital management, etc.)

Finally, a failure of mass level job creation has become the biggest elephant in the room for muted consumption and hence for the ability to grow at a sustained 7%+ for the next 25 years. 

The Budget has an outlay of Rs 1.48 lakh crores in FY25 for education, employment and skilling

The focus, front and centre, of the Government’s vision as communicated in the Budget speech is to incentivise well-paying employment opportunities, much of this through skilling. The Budget has an outlay of Rs 1.48 lakh crores in FY25 for education, employment and skilling, and targets 4.1 cr youth opportunities over the next 5 years. An Employment Linked Incentive scheme for companies is a key pillar, focusing on first time employees, with the obvious intent of encouraging hiring in the formal sector. 

In conclusion, the effectiveness of these strategies will ultimately depend on their implementation. Circling back to the 9 priorities mentioned earlier, these will present formidable challenges. The Government does well to recognise that collaboration between the Centre and States will be key in effective implementation.