THE BUDGET: WHAT CAN WE EXPECT?
Finance Minister Nirmala Sitharaman will present the first Budget of the third successive government under the leadership of Prime Minister Narendra Modi.
Such a budget presentation is typically a quinquennial event in India.
Once every five years, the Union Budget is presented twice — first as an interim budget (in February) by the outgoing government and then as a full budget by the newly-formed government.
Sitharaman had presented an interim Budget for the current financial year (2024-25) on February 1.
WHAT IS BUDGET?
A Budget is essentially an exercise where the government tells the Parliament (and through it, the whole country) about the health of its finances. This means coming clean on three main things: income, expenditure and borrowing.
Further, since a Budget typically comes at the end of one financial year and the start of another, it tells the citizens not only how much money the government raised last year, where did it spend it, and how much did it have to borrow to meet the gap but also gives an estimate about what it expects to earn in the next financial year (in the present case, the current financial year), how much and where it plans to spend it, and how much would it likely have to borrow to bridge the gap.
HOW DOES A BUDGET INFLUENCE THE ECONOMY?
Apart from not overburdening people with increasing levels of borrowings and debt, a
government can use the budget to influence the behaviour of Indian citizens and businesses in two broad ways.
- By tweaking who it taxes and how much.
- For instance, if a government wants to incentivise businesses in one segmentof the economy — presumably because it believes such a move will leverage India’s demographic profile, create jobs and bring prosperity — it can lower the tax rate.
- To be sure, lowering the tax rate may not necessarily lead to lower revenues; it is quite possible that the increased economic activity (due to the lower tax rate) leads to higher overall revenues despite a lower tax rate.
- By tweaking where a government spends and how much: While the budget is only for a year, budgets at the start of a new government’s term (as is the case this time) can often signal a broader shift in how the government wants to spend its money.
- For instance, arguably the biggest macroeconomic policy shift of the last government (2019-2024) was the focus on incentivising investments by the private sector. To this end, the government gave a historic tax break in corporate tax on the one hand, while boosting its own spending in infrastructure on the other.
However, this strategy has met with a muted response.
WHAT TO LOOK OUT FOR IN THIS BUDGET?
- Tax revenues
Government’s tax revenues have been becoming progressively more responsive to increases in total GDP. Better ‘tax buoyancy’ can provide higher than anticipated income to the government.
- Expenditure towards rural India and small businesses
These are the segments that are still struggling with economic distress.●
- Subsidy outgo
There is only so much that a government can spend in the form of a direct benefit from the government to one segment of the economy or the other.
- Fiscal Deficit
Each year’s fiscal deficit adds to the existing mountain of government debt. In the previous 10 years, Modi-led government has never achieved the prudential norm of a fiscal deficit being 3% of GDP.
- Overall philosophy
The first budget of a new government enunciates the broader approach it hopes to follow towards managing the economy.
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