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24 Jul 2024

Budget 2024-25: A Five-Year Roadmap for India’s Economy

Context

  • The first budget of the NDA government’s third term sets forth two primary expectations for the economy - a clear roadmap on fiscal consolidation and a strategy for medium-term interventions to address the challenges facing the economy.
  • The budget presented by the finance minister addressed both these expectations effectively.
  • Also, with an eye on generating employment, improving infrastructure and rationalisation of GST, budget 2024 offers some elements of a medium-term framework for economic policy.

Noteworthy Aspect of NDA 3.0 First Budget: Commitment to Fiscal Consolidation

  • Reduction in Fiscal Deficit
    • Fiscal deficit represents the gap between the government's total expenditure and its total revenue (excluding borrowings).
    • For the fiscal year 2024-25, the budget sets the fiscal deficit target at 4.9 percent of GDP, a reduction from previous estimates.
    • This target is significant as it indicates a disciplined approach to managing public finances. Furthermore, the budget aims to achieve a fiscal deficit of 4.5 percent of GDP in the following fiscal year, moving closer to the long-term goal of a sustainable fiscal balance.
    • This gradual reduction reflects a strategic balance between fiscal prudence and the need to support economic growth.
  • Debt-to-GDP Ratio
    • The budget projects a decrease in the central government’s debt-to-GDP ratio from 58.2 percent to 56.8 percent.
    • This reduction indicates a proactive effort to manage the country’s debt levels, ensuring that debt does not grow faster than the economy.
    • Lowering the debt-to-GDP ratio is essential for maintaining investor confidence and ensuring the sustainability of public finances.
  • Flexibility in Fiscal Policy
    • The incorporation of flexibility in fiscal policy allows the government to respond quickly to economic fluctuations and unforeseen challenges.
    • The budget does not provide a detailed roadmap beyond 2025-26, instead proposing to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP.
    • This flexibility can be advantageous in dealing with economic uncertainties, though it may limit predictability for businesses and investors.
  • Utilisation of Surplus and Efficient Resource Allocation
    • In recent years, the government has utilised surplus revenues, particularly from the Reserve Bank of India, to support fiscal consolidation.
    • This year’s budget continues this trend, with surplus receipts contributing to the reduction of the fiscal deficit.
    • By directing additional resources toward debt reduction, the government demonstrates fiscal prudence and a long-term vision for economic stability.

Some Other Positive Takeaways from the Budget Speech

  • Balancing Fiscal Prudence and Expenditure Needs
    • Fiscal consolidation often necessitates a careful balance between reducing deficits and ensuring adequate public expenditure.
    • The budget achieves this balance by not only focusing on deficit reduction but also addressing critical expenditure needs.
    • Over the past three years, buoyant tax revenues have provided additional fiscal space, allowing for increased allocations to various spending programs.
    • This year, some of the additional resources have been directed toward fiscal consolidation, while others have been allocated to essential public services and infrastructure projects.
    • This balanced approach ensures that fiscal prudence does not come at the expense of necessary public investments.
  • Medium-Term Economic Interventions
    • Addressing the challenges highlighted in the Economic Survey 2023-24, the budget outlines initiatives for the current year and the next five years.
    • Key concerns include employability and employment for the youth and improved infrastructure.
    • Initiatives to enhance employability through skilling and higher employment through financial support for provident fund contributions are proposed.
    • While these initiatives are welcome, a comprehensive framework would help identify synergies among potential initiatives.
    • The proposal to present an economic policy framework is a positive step, as it can help establish consistent medium-term expectations on likely reforms.

Proposals Outlined in Budget Aimed at Rationalising Tax Structures

  • Indirect Tax Reforms: GST and Customs Duties
    • GST Rationalisation
      • The Goods and Services Tax (GST) regime has been relatively stable in terms of its structure and design.
      • However, the budget signals the need for further rationalisation of GST rates. This includes streamlining the tax slabs to reduce complexity and improve compliance.
      • By making the GST structure more coherent, the government hopes to boost economic activity and enhance revenue collection.
    • Expansion of GST Base
      • The budget proposes to expand the GST base and this involves bringing more goods and services under the GST ambit, thereby increasing the tax net.
      • Expanding the base can help in raising additional revenue without increasing the tax rates.
      • It also promotes fairness by ensuring that more sectors contribute to the tax system.
      • This approach is crucial for achieving a more inclusive and balanced tax regime.
    • Recalibration of Customs Duties
      • The government uses customs duties to achieve multiple objectives, including protecting domestic industries and enhancing competitiveness.
      • The budget proposes regular recalibration of customs duties to address varying economic concerns.
      • For instance, duties may be reduced to lower the cost of essential imports or increased to protect nascent domestic industries from international competition.
  • Direct Tax Reforms: Simplification and Equity
    • Review of the Income Tax Act
      • The budget proposes a comprehensive review of the Income Tax Act to make it more concise, lucid, and user-friendly.
      • This initiative aims to simplify the tax code, making it easier for taxpayers to understand their obligations and comply with the law.
    • Vivad se Vishwas Scheme 2024
      • To address the long-standing issue of tax disputes, the budget introduces the Vivad se Vishwas, 2024 scheme.
      • This scheme aims to resolve pending litigation by offering taxpayers a one-time opportunity to settle disputes by paying a reduced amount of the contested tax.
    • Limiting Appeals and Enhancing Dispute Resolution
      • In addition to the Vivad se Vishwas scheme, the budget proposes measures to limit the number of appeals by tax departments in cases involving small liabilities.
      • This step is intended to reduce unnecessary litigation and focus on significant cases.
  • Addressing Inequality: Taxing Capital Gains and High-Income Earners
    • Globally, there is an increasing concern about rising economic inequality and the need for progressive taxation.
    • The budget addresses this issue by proposing higher taxes on capital gains, both short-term and long-term.
    • While this move may impact investors, it is intended to ensure that those who benefit significantly from capital markets contribute their fair share to the economy.
    • To balance this, the budget raises the exemption limit for retail investors to Rs 1.25 lakh, providing relief to small investors.
  • Enhanced Securities Transaction Tax (STT)
    • Additionally, the budget proposes an enhanced STT on futures and options transactions.
    • This measure aims to curb speculative activities in the capital markets and bring stability.
    • By cooling some of the fervour in the markets, the government hopes to reduce volatility and create a more stable investment environment.

Conclusion

  • The commitment to fiscal consolidation in the NDA 3.0 government’s first budget is
  • The strategic reduction in the fiscal deficit, the projected decline in the debt-to-GDP ratio, the flexibility in fiscal policy, and the efficient utilisation of surplus resources collectively demonstrate a disciplined and forward-looking approach to fiscal management.
  • Balancing fiscal prudence with essential public expenditure needs, the budget lays a robust foundation for sustainable economic growth and financial stability, developing confidence among investors and citizens alike.

 

 

Editorial Analysis

Current Affairs
July 24, 2024

Angel Tax
Recently, the Union Minister for Finance proposed to abolish ‘angel tax’ for all classes of investors, while presenting the Union Budget 2024-25 in Parliament.
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About Angel Tax:

  • It was levied on the capital raised via the issue of shares by unlisted companiesfrom an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company.
    • The excess funds raised at prices above fair value are treated as income, on which tax is levied.
  • It derives its genesis from section 56(2) (viib) of the Income Tax Act, 1961.
  • It was first time introduced in 2012to prevent black money laundering through share sales.
  • It was levied at a rate of 30.9% on net investments in excess of the fair market value.
  • In 2019, the Government announced an exemption from the Angel Tax for startups on fulfillment of certain conditions. These are:
    • The startup should be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as an eligible startup.
    • The aggregate amount of paid-up share capital and share premium of the Startup cannot be more than ₹25 crores. This amount does not include the money raised from Non-Resident Indians (NRIs), Venture Capital Firms, and specified companies.
  • For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption.
  • However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.
Economy

Current Affairs
July 24, 2024

Clarion-Clipperton Zone
India will apply for licences from International Seabed Authority (ISA) to explore for deep-sea minerals in the Pacific Ocean especially plans to focus on the Clarion-Clipperton Zone.
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About Clarion-Clipperton Zone (CCZ):

  • It is a vast plain in the North Pacific Ocean between Hawaii and Mexico.
  • It is known to hold large volumes of polymetallic nodules containing minerals used in electric vehicles and solar panels including manganese, nickel, copper, and cobalt.
  • First discovered by British sailors in 1873, the potato-shaped nodules take millions of years to form.
  • Up to 30 cetacean populations, including globally endangered species like blue whales, can be found in the CCZ, where 17 exploratory deep-sea mining licenses have been granted.

Key facts International Seabed Authority (ISA)

  • It is an international organization established in 1994 to regulate mining and related activities in the international seabedbeyond national jurisdiction, an area that includes most of the world’s oceans.
  • It came into existence upon the entry into force of the 1982 United Nations Convention on the Law of the Sea (UNCLOS), which codified international law regarding territorial waters, sea lanes and ocean resources. 
  • Members: It has 169 Members, including 168 Member States and the European Union.
  • Functions
    • It is responsible for granting licenses and regulating activitiesrelated to the exploration and exploitation of mineral resources in the international seabed. 
    • It ensures that these activities are carried out in a manner that protects the marine environment and promotes the equitable and efficient utilization of resources.
  • Headquarters: Kingston, Jamaica
Geography

Current Affairs
July 24, 2024

What is Climate Finance Taxonomy?
Presenting the Union Budget for 2024-25, the Finance Minister announced that the government would develop a ‘climate finance taxonomy’.
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About Climate Finance Taxonomy:

  • It is a system that classifies which parts of the economy may be marketed as sustainable investments.
  • It helps guide investors and banks in directing trillions toward impactful investments to tackle climate change.
  • Taxonomies are frequently used to set standards for classifying climate-related financial instruments (e.g., green bonds), but, increasingly, they serve other use cases where the benchmarking feature is viewed as beneficial, including in the areas of climate risk management, net-zero transition planning and climate disclosure.
  • South Africa, Colombia, South Korea, Thailand, Singapore, Canada and Mexico are some of the countries which have developed taxonomies. The European Union has done this as well.
  • Significance
    • With global temperatures soaring and the adverse effects of climate change exacerbating, countries need to transition to a net-zero economy: the balance between the amount of greenhouse gas (GHG) that is produced and the amount that is removed from the atmosphere.
    • It can play a pivotal role in doing this as they can help ascertain if economic activities are aligned with credible, science-based transition pathways.
    • They can also give impetus to deployment of climate capital, and reduce the risks of greenwashing.
    • It will enhance the availability of capital for climate adaptation and mitigation. This will help India achieve its climate commitments and green transition.
Economy

Current Affairs
July 24, 2024

Electric Mobility Promotion Scheme
Recently, the central government said that the Electric Mobility Promotion Scheme (EMPS) 2024 will provide further impetus to the green mobility and development of electric vehicle (EV) manufacturing ecosystem in the country.
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About Electric Mobility Promotion Scheme:

  • It aims to further accelerate the adoption of Electric Vehicles in the country.
  • Funding: It is a fund limited scheme with a total outlay of Rs. 500 crore for the period of 4 months.
  • It is for faster adoption of electric two-wheeler (e-2W) and three-wheeler (e-3W)to provide further impetus to the green mobility and development of electric vehicle (EV) manufacturing ecosystem in the country. 
  • Scheme duration: The Scheme duration is 4 months i.e. April 01, 2024 till July 31, 2024.
  • Eligible Electric Vehicle categories
    • Two Wheelers (electric) (e-2W)
    • Three-wheeler (electric) including registered e-rickshaws & e-carts and L5 (e-3W)
  • The scheme will be applicable mainly to those e-2W and e-3Ws registered for commercial purposes. Further, in addition to commercial use, privately or corporate owned registered e-2W will also be eligible under the scheme.
  • To encourage advanced technologies, the benefits of incentives will be extended to only those vehicles which are fitted with advanced batteries.
  • The EVs eligible for incentivisation under EMPS 2024 scheme must be manufactured and registered within the validity period of EMPS -2024 certificate
  • Components 
    • Subsidies: Demand incentives for e-2W & e-3W. Available for consumers in the form of an upfront reduced purchase price (Rs. 5,000 per kWH) of EVs, which will be reimbursed to OEM (Original Equipment Manufacturer) by Government of India. 
    • Administration of Schemeincluding IEC (Information, Education and Communication) activities and fee for Project Management Agency (PMA). 
  • Nodal Ministry:Ministry of Heavy Industries
Environment

Current Affairs
July 24, 2024

Vishnupad Temple
Recently, Finance Minister announced during her Union Budget speech that corridor projects will be built for the Vishnupad Temple at Gaya and the Mahabodhi Temple at Bodh Gaya in Bihar.
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About Vishnupad Temple:

  • It is in the state of Bihar and dedicated to Lord Vishu.
  • It was built in 1787 on the orders of Queen Ahilyabai Holkar of Ahmadnagar.
  • It is located on the banks of the Falgu river.
  • Architecture: Architecturally, the temple is around 100 feet tall and has 44 pillars.
  • Devotees visit the temple during pitra paksh, a period in the Hindu calendar when people take part in rituals to remember their ancestors.

Key facts about Mahabodhi Temple

  • The temple stands to the east of the Mahabodhi Tree, where Gautam Buddha is believed to have attained nirvana. The temple has a unique shape and a height of 170 feet.
  • It is located in Bodh Gaya, in central Bihar, on the banks of the Niranjana River.
  • The Mahabodhi Temple Complex is the first temple built by Emperor Asoka in the 3rd century B.C., and the present temple dates from the 5th–6th centuries.
  • It is one of the earliest Buddhist temples built entirely in brick, still standing, from the late Gupta period and it is considered to have had significant influence in the development of brick architecture over the centuries.
  • It was recognized as a UNESCO World Heritage Site in 2002.
Art and Culture

Current Affairs
July 24, 2024

What is INS Brahmaputra?
The Indian Navy's INS Brahmaputra warship, docked at Mumbai Dockyard for refitting, overturned under mysterious circumstances after a fire broke out, leading to significant damage, and one sailor reported missing.
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About INS Brahmaputra:

  • INS Brahmaputra is the first of the indigenously built 'Brahmaputra' class-guided missile frigates. 
    • The Brahmaputra class, which replaces the Talwar class, is an indigenous upgrade on the Godavari class of frigates.
    • The class’s next two ships, INS Betwa and INS Beas, were similarly given river names; INS Brahmaputra is the class lead ship.
  • It was built by state-run Garden Reach Shipbuilders and Engineers Limited (GRSE).
  • It was commissioned into the Indian Navy in April 2000. 
  • Features:
    • The ship has a displacement of 5,300 tonnes, a length of 125 metres, and a beam of 14.4 metres
    • It is capable of speeds of more than 27 knots.
    • The ship is manned by a crew of 40 officers and 330 sailors.
    • The ship is fitted with medium-range, close-range and anti-aircraft guns, surface-to-surface and surface-to-air missiles, and torpedo launchers.
    • The ship has a wide array of sensors covering all facets of maritime warfare and is capable of operating Seaking and Chetak helicopters.
Science & Tech

Current Affairs
July 24, 2024

What is a Skill Loan Scheme?
The Union Finance Minister recently announced a revision to the model skill loan scheme, which will now facilitate loans up to Rs 7.5 lakh backed by a guarantee from a government-promoted fund.
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About Skill Loan Scheme:

  • It was introduced in July, 2015, to offer institutional credit to individuals pursuing skill development courses aligned with National Occupations Standards and Qualification Packs. 
  • These courses are conducted by training institutes following the National Skill Qualification Framework (NSQF) and lead to certifications, diplomas, or degrees.
  • The Scheme applies to all member banks of the Indian Banks’ Association (IBA) and other banks and financial institutions as advised by the Reserve Bank of India (RBI). 
  • Features:
    • Eligibility: Any Indian National who has secured admission in a course run by Industrial Training Institutes (ITIs), Polytechnics, or in a school recognised by Central or State Education Boards or in a college affiliated with a recognised university, training partners affiliated to National Skill Development Corporation (NSDC) Sector Skill Councils, State Skill Mission, or State Skill Corporation can avail loan for the purpose.
    • No specific restriction with regard to age.
    • Courses: Aligned with NSQF.
    • Duration of Course: No minimum duration.
    • Quantum of Finance: 5,000-1,50,000. Now, it has increased to Rs 7.5 lakh.
    • Moratorium: Duration of the course.
    • Repayment Period:
      • Loans up to Rs. 50,000: Up to 3 years.
      • Loans between Rs. 50,000 to Rs. 1 lakh: Up to 5 years.
      • Loans above Rs. 1 lakh: Up to 7 years.
    • Coverage: Course fees and expenses for assessment, examination, study material, etc.
    • Interest Rate: The interest rate to be charged by the bank should not be more than 1.5% p.a. over and above repo-linked-lending-rate (RLLR) or any other external benchmark interest rate conforming to RBI guidelines.
    • Collateral: The scheme does not allow for collateral to be charged from the beneficiary.
    • Ministry of Skill Development and Entrepreneurship (MSDE), through a November 2015 notification, brought into force the Credit Guarantee Fund for Skill Development (CGFSSD) for all skill loans sanctioned on or after 15 July 2015, to be administered by the National Credit Guarantee Trust Company (NCGTC).
    • Banks can apply to the NCGTC for a credit guarantee against defaults, and the NCGTC will provide this guarantee at a nominal fee which shall not exceed 0.5% of the amount outstanding.
    • The guarantee cover will be for a maximum of 75% of the outstanding loan amount (including interest, if any).
Economy

Current Affairs
July 24, 2024

What is Tax Incidence?
The Union government recently said Goods and Services Tax (GST) has decreased tax incidence on the common man.
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About Tax Incidence:

  • It is an economic term for understanding the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers.
  • There are two forms of tax incidence:
    • The initial incidence (also called statutory incidence) of a tax is the initial distribution among taxpayers of a legal obligation to remit tax receipts to the government.
      • It is established by law and tells us which individuals or companies must physically send tax payments to state and local treasuries.
    • The final incidence (also called economic incidence) of a tax is the final burden of that particular tax on the distribution of economic welfare in society.
      • It is also referred to as the tax burden faced by individuals in their roles as consumers, workers and investors.
    • For example, the legal incidence of corporate income taxes typically falls on companies, but the economic incidence of the tax is shifted forward to others, in the form of higher prices for consumers, lower wages for workers, reduced returns to shareholders, or some combination of the three.
    • The difference between the initial incidence and the final incidence is called tax shifting.
  • The tax incidence depends upon the price elasticity of supply and demand.
    • If the demand for a good changes significantly with a change in price, then a good is elastic—likely a non-necessity like a new car or home goods.
    • Little to no change in demand in relation to price means a good is inelastic, and consumers will continue to purchase the good as prices go up. Examples of inelastic goods include petrol and cigarettes.
  • Taxes on inelastic goods like cigarettes shift the tax incidence to the consumer who will continue to purchase the product, despite the price increase from the tax.
  • Conversely, if a tax is levied on an elastic good, the tax incidence falls on the producer because the new price increase is likely to reduce the demand for the good.
Economy
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