New government, new budget priorities: Balancing growth and welfare

With the celebration of democracy having reached its conclusion with the new government being set up after the world’s largest elections, the focus is back on perhaps the most important facet of policy making, the union budget. Given the new administrative coalition in place, the budget numbers will possibly showcase an important message on how key priorities are getting shaped for the next five years.

For the past decade, a hallmark of India's fiscal policy has been a focus on long-term stability, even amidst challenges. The government resisted populist measures, opting for prudent approaches like targeted COVID relief for food security and small businesses. This commitment to fiscal discipline is evident in the revised FY24 deficit figures – initially projected at 5.9%, it eventually settled at a lower 5.6%. The interim budget for FY25 continues this trend, with an ambitious target of reducing the fiscal deficit to 5.1% of GDP. We can expect this trend to continue with the government prioritising a reduction of the deficit, following a counter cyclical policy stance, as the economy continues to perform better than expected. The overall budget deficit is likely to be the same as the 5.1% announced in the interim budget.

Beyond fiscal prudence, the government has shown a preference for long-term policies that reshape the economy through infrastructure development and overall investment, rather than solely relying on consumption. Historically, India's growth relied heavily on consumer spending. Now, the government seeks to encourage investment for a more stable foundation for future prosperity. This shift is evident in the significant increase in capital expenditure – a 33% hike for FY24, further augmented by an 11% rise in the interim budget. Additionally, infrastructure creation in roads, railways, and waterways has received a boost, and the Gati Shakti program streamlines project planning. We can expect this focus on infrastructure and capital expenditure to continue in the coming year, shaping the economic landscape for the next five years.

However, while infrastructure and capital expenditure are likely to flourish, the critical question lies in how the budget addresses two key areas: welfare schemes for the underprivileged and the agriculture sector. The current economic climate grapples with a mismatch between new technology-driven jobs and a workforce lacking the necessary skills. The pandemic has also exacerbated the gap between the "haves" and "have-nots." These realities point to the need for adjustments in spending patterns.

Social sector expenditure, encompassing education, healthcare, rural development, and social security, has witnessed a mixed trend in recent budgets. While there have been increases in absolute terms, the share of social sector spending as a percentage of total expenditure has shown some decline. In fact, FY24 was the first year which saw social sector expenditure drop below 20% of total expenditure to 18% of total government spending. The upcoming budget is likely to be a turning point as new government is likely to address social disparities and a renewed focus on social sector expenditure is anticipated. This likely going to involve Increased allocation for education and skill development, Focus on healthcare accessibility, Revitalizing rural development schemes and some Strengthening social safety nets. In fact, we may also witness an expended list of sectors under the Production Linked Incentive schemes that may further be linked to jobs being created for availing incentives along with achievements in sales.

It's important to note that policy pronouncements have increasingly been made throughout the year rather than concentrated solely within the budget document. The budget itself has evolved into a platform for outlining major expenditures and revenue trends from both direct and indirect sources. As in the case of most developed economies, India is too treading the same path wherein budgets become more of an accounting exercise rather than a platform for announcing major policies. This has benefits in terms of reducing volatility in the markets while also bringing in agility in the system to respond through the year.

The upcoming budget, under the new government, is likely to be a balancing act – maintaining fiscal discipline while addressing the social and economic needs of the populace. Expectations are high, fueled by the fresh mandate. A well-executed budget can position India for a future with a more inclusive and resilient economy, where growth is accompanied by equitable development and improved living standards for all.

This article first appeared in ET Insights on 09 July 2024.