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.