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Published: June 15, 2024
Updated: June 15, 2024

FM's nightmare Poll shadow over budget

With its drastically reduced seat share in the new Lok Sabha, the NDA government helmed by Prime Minister Narendra Modi will not be able to push through economic and fiscal measures as in the past.

Finance Finance Finance Minister Nirmala Sitharaman can, when she presents the Union budget in July, derive some personal satisfaction for having set a record of seven consecutive Union budget presentations, but on the flip side she and her mentor, the Prime Minister, will have to factor in coalition pressures and demands.

Grand pronouncements about the future of the economy will have to take a back seat in favour of pressing issues like stress in the agriculture sector, job creation, rising inflation hurting lower-income and middle-income sections, sustaining capex momentum and measures to boost economic growth while managing inflation.

Ms Sitharaman Ms Sitharaman Ms Sitharaman will also have to factor in global uncertainties caused by the economic slowdown in the US and Europe, and the ongoing Russia-Ukraine and Israel-Palestine conflicts, while striking a balance between bold fiscal initiatives and fiscal prudence.

It will be an occasion to remember for Nirmala Sitharaman for the rest of her life as she presents the final budget for fiscal 2024-25 in second half of July this year. The reason: the Union Finance Minister will have set a new record of presenting seven consecutive Union budgets, overtaking Morarji Desai whose record of six consecutive budget presentations has stood for six decades.

On the flip side, her budgetary exercise this time will be a particularly challenging one, considering that Prime Minister Narendra Modi’s Bharatiya Janata Party suffered a major hiccup in the country’s recently concluded general elections, plummeting by more than 60 seats from its humongous 303-seat tally in the 2019 general elections.

The writing on the wall was clear: Indians by and large were not in a mood to once again give Mr Modi a carte blanche to govern them, and he had to adapt to the new reality as he was sworn in as Prime Minister for a third consecutive term with the help of NDA partners Chandrababu Naidu of Andhra Pradesh and Nitish Kumar of Bihar. Tellingly, a chastened Mr Modi is not anymore speaking in terms of ‘Modi 3.0’ or even a BJP government, instead referring to his new dispensation as an NDA government.

With the ‘Modi wave’ having ebbed so noticeably in the country, Madam Finance Minister has her task cut out in preparing a Union budget which pleases all constituents of the NDA and the alliance’s supporters among the public. Mr Modi has been the behind-thescenes mentor to the Finance Minister all along, and will himself have realized by now that the people are by and large frustrated on account of rising inflation, widespread unemployment, growing stress in the agricultural sector, and revenue growth at the expense of other human development parameters.

TOUCH CHOICES

Ms Sitharaman also faces the daunting task of presenting a comprehensive budget amid pending reforms. The focus will be on whether the government will adhere to the fiscal deficit target of 5.1 per cent of GDP, as outlined in the interim budget of 2024 presented in February, or whether it will pursue more aggressive fiscal consolidation bolstered by a record Rs 2.1 lakh crore dividend received from the Reserve Bank of India. The path taken by will be closely monitored by S&P Global Ratings which may consider a rating upgrade if fiscal discipline is maintained.

Preliminary exercises on budget preparation have been started in right earnest, with Ms Sitharaman chairing four pre-budget consultations with leading economists, capital market and financial experts, industry leaders and associations, representatives from farmers’ associations and agricultural economists. While the date of the presentation of the Union budget is yet to be announced, Corporate India learns from sources in North block that the budget will be presented in the Parliament during the monsoon session of the Parliament beginning on July 22.

What should budget watchers expect in this budget!

• Income tax exemption limit may be raised.
• Income tax rates for individuals may be slashed.
• GST rates may be rationalized by the GST council.
• Select PSUs may be privatized.
• Concrete measures may be taken for preparing and empowering MSMEs to grow and compete globally.
• Special financial packages may be given to Andhra Pradesh and Bihar. Attention may also be given to Odisha, Jharkhand, West Bengal and Chhatisgarh.
• Growth plans for the railways may be expedited. Three major corridors which are pro grammed for railways may be implemented. 40,000+ coaches may be brought to the level of Vande Bharat.
• To promote research and innovation, a Rs 1 lakh crore corpus may be earmarked.
• Measures may be taken to boost tourism.
• There may be a spurt in capex for infrastructural development, subject to compensation to be paid to Chandrababu Naidu and Nitish Kumar for providing support to the NDA government.
• Concrete steps may be taken to bolster the Ayush sector in order to improve Ayush infrastructure, research and accessibility.

Market confident of strong equity cult after the budget

The stock market is not too worried about the forthcoming final budget for fiscal 2024-25 as marketmen expect political stability at the Centre, policy continuity, and an absence of any major negative factor. Little wonder that in the fortnight before the presentation of the budget, stock market indices have scaled new highs. Even though the Bharatiya Janata Party failed to gain a majority on its own in the recent general elections, marketmen think that the Narendra Modi-Amit Shah combine represents shrewd, street-smart politicians.

Little wonder then that despite a relatively poor performance at the hustings, Mr Modi has become the Prime Minister for the third time, and all the important portfolios have been entrusted to his trusted party members, creating an environment of stability. What is more, he has succeeded in getting Om Birla, a controversial politician, back in the Lok Sabha Speaker’s chair.

However, marketmen are worried that the poll outcome will create a nightmare for Finance Minister Nirmala Sitharaman. She will have to give a populist flavour to the budget to soften the anger of the masses who have been facing a miserable situation on the price front, with rising inflation disturbing household budgets, growing unemployment, and increasing transportation charges. Marketmen are afraid that if the FM goes for large populist measures, it will adversely impact the country’s fiscal prudence, that too at a time when the national debt has reached a sky-high level.

‘PLUS’ FACTORS

At the same time, marketmen are happy that because of the adverse poll outcome for the BJP, the income-tax burden on the middle class will be reduced, leaving more money in their pockets. However, in order to placate disgruntled farmers, Ms Sitharaman will push have to up the outlay for rural development. Positive steps in this direction have already been initiated even before the presentation of the budget. Minimum support prices (MSP) for several crops have been substantially raised. The GST on fertilisers is going to be slashed and the budget is expected to shower higher subsidies and increased allocations for agricultural modernisation. The idea is to augment farmers’ incomes. In fact, this will be a positive factor for stock market sentiment as rural consumption will get a boost.

Some marketmen fear that the Finance Minister may tamper with the long-term capital gains tax. If this happens, it will be a negative factor for the market. This apprehension is due to the fact that the Prime Minister Modi is keen to take away a portion of the windfall gains of stockholders. But there are other marketmen who are confident that Amit Shah, the Home Minister, and a major influencer on policy decisions, will not allow such an exercise. Again, it is believed that for the first time in the 75-year history of independent India, the Prime Minister, the Home Minister and the Finance Minister had ‘advised’ investors to go for a group of stocks. Having faced much media criticism on this score, they are not likely to tweak long-term capital gains tax at this juncture.

INFRA STRESS

Another positive factor for the stock market will be a continued emphasis on infrastructural development, leading to augmenting of capital expenditure.

Sources close to North Block, where the finance ministry is located, indicate that the budget will pay more attention to sunrise sectors like green energy, electrical vehicles and renewable energy, as well as defence, railways, infrastructure and shipping companies.

Besides maintaining a thrust on infrastructure, the budget may take steps to expand the scope of ‘Make in India’, ‘Atmanirbhar Bharat’, ‘Vande Bharat’ and ‘Maritime Amrit Kaal Vision’. Little wonder then that several knowledgable HNIs (high net worth investors) have started taking stocks of these sectors on their radar. A leading analyst insists that as there is no major systemic risk visible in the Indian stock market in the near term, investors should not worry but should shift their focus from momentum to value and quality.

Sectors which are expected to do well after the budget. These sectors are:

• Green energy
• Renewable energy
• Infrastructure
• Defence
• Railways
• Automobiles
• Auto components
• Agri sector
• FMCG
• Travel, tourism, hotels

It is learnt that during the pre-budghet discussions, farmers’ associations narrated the plight of their constituents while industry leaders strongly advocated reducing the income tax burden on individuals, increasing capital expenditure and implementing measures to control food inflation. Industry leaders also emphasized the need for a heightened focus on infrastructure development to sustain economic growth. They also highlighted the importance of bolstering the MSME (micro, small, and medium enterprises) sector, which is a crucial cog in the Indian economy and a key source of employment.

For her part, Ms Sitharaman has reportedly directed officials of her ministry to get down to the nitty-gritty of the budgetary exercise, and has stressed the need for meticulous planning and comprehensive analysis as part of the process. She has reportedly instructed her staff to prepare a well-structured budget which effectively addresses the country’s economic priorities and challenges.

MAJOR FACTORS

It goes without saying that both internal and external factors will majorly influence the budgetary exercise. The internal development is that with the BJP’s setback at the hustings, Mr Modi has realized that his policies are not appreciated across the board within the country. Hence, rather than making grandiose projections of the country’s economy in 2047, 2050 or 3000 AD, the government will have to tackle current issues like stress in the agriculture sector, job creation, rising inflation hurting lower-income and middle-income sections of the populace, sustaining capex momentum and measures to boost economic growth while managing inflation.

On the external front, the Finance Minister will have to factor in global uncertainties and conflicts which have led to domestic demands for reduced income taxes, increased capital expenditure and measures to control food inflation. In the face of a potential economic slowdown in the US, Europe and elsewhere, and the ongoing RussiaUkraine and Israel-Palestine conflicts, Ms Sitharaman will have to strike a balance between bold fiscal initiatives and fiscal prudence.

'PRICE' OF ALLIES

In these circumstances, it will be a daunting task for the Finance Minister to prepare a growth-oriented budget. The price the government will have to pay Mr Naidu and Mr Nitish Kumar for the development of their states will be a heavy burden on resources. On the other hand, in view of the poll outcome, the Finance Minister will have to increase the income tax exemption limit, rationalize GST rates (the process has already begun), and take liberal steps to please disgruntled farmers (the MSPs of several agricultural products have already been raised). Again, as industry leaders and economists have suggested, capital expenditure, particularly on infrastructure, will have to be enhanced. At the same time, in view of the global economic uncertainties, the Finance Minister will have to take steps to promote domestic industrial production by expanding promotional schemes like the PLI (production linked incentive) scheme.

The GST council chaired by Ms Sitharaman has already had a pre-budget sitting. Very likely, she will be forced to reduce GST rates in order to placate a public that is disenchanted with the higher cost of living

REVENUE RIDDLE

Thus, with income tax rate cuts and GST rate rationalization, tax revenues will be adversely affected. But a more challenging situation will be raising non-tax revenues, particularly PSU disinvestment which, aside from the sale of Air India to the Tatas, has made extremely slow progress. Analysts predict that the government will not be able to register any noticeable success in its disinvestment performance this year. As per one analyst, the government is most likely to miss its disinvestment target for the fifth consecutive year, and that too by a wide margin - expectations for the new fiscal year (2024-25) in the interim budget were not high as previous stake sale plans are yet to materialize. For the last fiscal (ended March 2024), the government had set a target of Rs 51,000 crore for disinvestment but the actual receipt was not even a third of that. Three months have already been passed in the current fiscal and a few of the last fiscal's disinvestment candidates still do not have any takers, including Shipping Corporation of India, NMDC Steel, BEML, HLL Lifecare and IDBI Bank. These will be in the disinvestment queue in the remaining three quarters (July 2024 to March 2025) of this fiscal. However, the process of due diligence for these entities is yet to be completed.

As far as IDBI Bank is concerned, the Centre has received several offers but the final clearance from the Reserve Bank of India and the Centre is still awaited. Moreover, the privatization of BEML and SCI faces public as well as political resistance.

R.B.I. LIFELINE

Interestingly, the government is not too bothered about the failure to achieve its disinvestment target as robust tax collections as well as the huge dividend transfer of Rs. 2.1 lakh crore from the Reserve Bank will push up the Centre's revenues. But the general elections outcome has created a big question mark as the Finance Minister will have to make provisions for paying Chandrababu Naidu and Nitish Kumar a huge amount of around Rs 3-5 lakh crore for the development of their states in lieu of the political support they extended to the Modi 3.0 government at the Centre.

The upcoming Union budget for financial year 2024- 25 is expected to address a variety of areas critical for India's development. Some key anticipated themes are:

• Social Welfare: Aligning with the 'Viksit Bharat' vision ('Developed India by 2047'), the budget is likely to prioritise welfare programmes for the underprivileged sections of society. This may include initiatives focused on:
• Poor: Schemes targeted at poverty alleviation and social safety nets.
• Women: Increased budgetary allocations for women's empowerment programmes.
• Youth: Initiatives promoting skill development and employment opportunities for young people.
• Farmers: Measures supporting agricultural growth and income security for farmers.
• Fiscal consolidation: The government might aim to maintain fiscal discipline alongside stimulating growth. Strategies may include:
• Fiscal deficit reduction: A potential target for lowering the fiscal deficit from the revised estimate of 6.4% in 2022-23 to a lower figure, perhaps around 5.9% of GDP.

Revenue Deficit Reduction: Efforts to reduce the revenue deficit from the revised estimate of 4.1% in 2022-23 to a lower target, possibly around 2.9% of GDP.

M.S.M.E. FEARS

Referring to the immediate budget challenges, an expert suggests that the finance ministry will need to address the controversy arising from the amendment to the Income Tax Act in the FY24 budget. This amendment mandates that large companies must pay micro, small, or medium enterprises (MSMEs) within 45 days under written agreements from April 1, 2024, or face disallowance of these expenses from their taxable income. This change has raised concerns among traders and certain MSMEs, who fear it might drive business away from registered MSMEs to unregistered ones. Finance Minister Nirmala Sitharaman has indicated a willingness to reconsider this issue and has encouraged MSMEs to present their cases before the budget.

According to a tax expert, the finance ministry may prioritize the long-delayed implementation of the Direct Tax Code (DTC). A task force submitted a draft report in 2019, with some recommendations already independently adopted. The new government may review the code afresh, considering emerging tax issues, particularly in the digital sector. Additional tax reforms on the agenda include revamping capital gains tax, reworking penalty-related legislation, and standardizing the taxation of all asset classes.

FISCAL DEFICIT

A key priority for the Finance Minister will be to maintain the fiscal glide path to achieve a fiscal deficit target of 4.5% of GDP by FY26 and expedite the strategic sale of IDBI Bank, Shipping Corporation and NMDC.

The finance ministry faces a substantial workload as it prepares the 2024-25 budget and addresses various pending reforms. Balancing fiscal discipline with strategic economic initiatives will be crucial for the new government, thus ensuring sustainable growth and stability in the Indian economy.