A non-event budget, which is a good thing

The interim Budget 2024 has few policy announcements. Given the coming elections, a work-in-progress budget is better than a freebie laden one

The average middle-class person has two expectations from the budget. One, to get a lower tax burden and two, to see proposals that lead to lower inflation. In Budget 2024, being an interim budget just ahead of the general elections, there were no expectations of tax changes, and none were announced. On the inflation front, the reduction of the fiscal deficit target to 5.1% of the Gross Domestic Product (GDP) is a reassuring step in the right direction.

Union finance minister Nirmala Sitharaman, carrying a folder-case containing the Interim Budget 2024. (PTI)

But first, what is the relation between fiscal deficit and inflation? The government spends more than it collects as revenue (that is both tax revenue and non-tax revenue) and it finances this deficit through borrowings. If the deficit is very large and even the borrowings are not enough, then the government takes recourse to printing money. This is inflationary as too much money chases too few goods. We saw episodes of this in the 2010-12 period when inflation reached double digits on the back of unbridled borrowing that reached 41% of the total government expense in the financial year 2009-10.

Let’s unpack this deficit number a bit more. We know as households we can take loans that are both good and bad. A bad loan buys us a holiday or a gadget and a good loan builds an asset — as a home loan does. Think of government finances in a similar way. It matters to us what the government borrows for — is it for current consumption or creating infrastructure? The revenue deficit measures the borrowing to finance the current consumption of the government and the corridor between the fiscal deficit and the revenue deficit is the amount that is being borrowed to spend on capital formation. The good news is that the revenue deficit number for FY 2024-25 is expected to go down to 2% from 2.8% in FY 2023-24 and the fiscal deficit is to go down from 5.8% to 5.1% over the same period.

India will borrow a total of ₹14.13 lakh crore in FY 2024-25: 79% of this will be used to fund capital expenditure. While borrowing and interest costs remain high, we are seeing a responsible use of the borrowed money to create capital assets rather than being used for freebies like farm loan waivers or increasing subsidies.

Another sharp trend is the growing evidence of formalisation of the economy and the growth of the middle class. We know that tax revenue comprises both direct and indirect tax revenue. Direct taxes are paid by us as individuals (on salaries, rent, interest, dividends and profits) and by corporations. Indirect taxes are, in effect, a tax on consumption and are paid by all of us through the Goods and Services Tax (GST). The share of income tax in the total revenue has gone up from 15% in FY 2023-24 to 19% in FY 2024-25. This shows both a growth in incomes coming under the tax net due to formalisation of the economy and of the growth in organised sector workers’ incomes as they are paying more tax. In fact, income tax data has shown a 20% average annual growth in the incomes of the cohort earning between ₹5.5 lakh and ₹25 lakh over a nine-year period ending in 2020-21. This momentum seems to be continuing.

Another factoid that is encouraging is the steady journey of the reducing share of subsidies in the budget. From 9% in FY 2018-19, the share of subsidies in the total expenditure went down to 8% last year and is now down to 6%. A falling share in a growing budget size of an economic liability is a good thing. Subsidies usually end up distorting economic incentives and almost always do not benefit those they are aimed to help.

Among the small number of specific announcements the FM made was one about setting up a corpus of ₹1 lakh crore for a 50-year interest-free loan for projects in the technology sector. Another one was about the “lakhpati didis” — the one crore women who through the self-help group route become lakhpatis. The target is now to make two crore lakhpati didis. To me, the crude statement of politician Farooq Abdullah that while this is a good thing, women should not become “naram” or soft towards their household duties came as a rude shock. If anyone ever wants to know why women remain outside the money conversation and empowerment — they just need to hear this statement that defines the mindset of men of a particular bent of mind. Not just lakhpati didis, I hope the job creation and asset gathering help crores of women become both lakhpatis and crorepatis in the years ahead.

One move that will clear the clutter of petty tax cases is the withdrawal of tax demands on the large number of “petty, non-verified, non-reconciled or disputed direct tax demands, many of them dating as far back as the year 1962” for amounts up to ₹25,000 up to the year 2009-10 and up to ₹10,000 for financial years 2010-11 to 2014-15. The FM expects this to benefit almost one crore taxpayers.

Interim Budget 2024 was a non-event and that is a good thing. Pre-election budgets can be used to distribute freebies to bribe voters. The lack of even one such budget proposal is being interpreted by political analysts as a sign of the confidence of the Modi government for an electoral hat trick.

Monika Halan is the author of the bestselling book Let’s Talk Money. The views expressed are personal