Union Budget 2024-25: Medium-term growth in focus

Macro Maths

In this Budget, with an underlying nominal GDP growth assumption of 10.5% and an assumed tax buoyancy of 1.03 in FY25, a growth of 10.8% in gross tax revenues has been budgeted, yielding an amount of Rs 38.4 lakh crore. However, due to higher budgeted tax devolution to states as compared to the Interim Budget, the government’s net tax revenue at Rs 25.83 lakh crore in the final Budget is lower by Rs 18,000 crore. By adding non-tax revenues of Rs 5.46 lakh crore, which includes the Reserve Bank of India’s enhanced dividends, the resultant revenue receipts amounted to Rs 31.29 lakh crore in 2024-25. By adding non-debt capital receipts of Rs 78,000 crore, aggregate non-debt receipts are estimated at Rs 32.07 lakh crore.

Further, by accelerating the pace of fiscal consolidation, with a target fiscal deficit-to-GDP ratio of 4.9% instead of 5.1%, a fiscal deficit magnitude of Rs 16.13 lakh crore has been budgeted. Thus, total expenditure amounts to Rs 48.2 lakh crore, which is divided into revenue and capital expenditures in the ratio of 77:23. Capital expenditure has been maintained at its Interim Budget level of Rs 11.11 lakh crore, while revenue expenditure has increased by 6.2% over FY24.

Pursuit of Fiscal Consolidation

From its peak of 9.2% in 2020-21, fiscal deficit-to-GDP ratio has been nursed back to 4.9% in 2024-25, paving the way to reach FRBM’s consistent level of 3% by 2027-28. This is particularly necessary since household sector financial savings, which provides the investible surplus, has been falling, reaching a trough of 5.3% of GDP in 2022-23. It is also notable that both gross and net market borrowings in 2024-25 would be less than that in 2023-24, providing ground for reducing the interest rates later in the year. The quality of fiscal deficit has also improved as measured by the ratio of revenue deficit to fiscal deficit which has fallen from its peak of nearly 80% in 2020-21 to 36% in 2024-25 (BE).

Role of States in the Development Process

There are several channels through which state governments’ resources have been augmented. As compared to the Interim Budget, there is an increase in the tax devolution to states by Rs 27,428 crore with an estimated enhanced total tax devolution to the states of Rs 12.47 lakh crore in 2024-25. Second, the grants to the states have been enhanced by Rs 16,840 crore. Third, on the capital account, a provision of a long-term interest-free loan amounting to Rs 1.50 lakh crore has also been provided. Fourth, the Union Budget shows a focus on supporting the development of eastern India through an initiative titled ‘Purvodaya’. Some additional proposed schemes to be undertaken in partnership with states include the development of industrial parks, development of cities as growth hubs, and projects focussing on water supply, sewage treatment and solid waste management.

Employment Initiatives

The employment question has been at the forefront of discussions in recent times. There is a need to distinguish between two kinds of employment opportunities. The first category constitutes jobs that are regular, formal, contract-based, and long-term. The second category consists of temporary jobs, available for a few years which may be used for training and skill building, serving relatively more as a placeholder during the waiting period as potential workers endeavour to move into the first category. The Budget has introduced an employment-linked incentive scheme which has three parts—first-timers joining a formal workforce, job creation in manufacturing related to first-time employees, and an employer-centric scheme covering all additional employment in all sectors within a salary of Rs 1 lakh per month. Incentives are also being provided to facilitate higher participation by women. Through the internship schemes, the Budget has also co-opted the private sector in the growth and employment augmentation initiatives. Some of these initiatives would provide temporary jobs with opportunities for training and skill building. The first category of jobs would eventually emerge from an employment-intensive growth process. According to RBI’s KLEMS database, there has been an acceleration of absorption of working age people in agriculture as well as non-farm sectors—mainly construction and trade—from 2017-18 onwards, rising from 475 million people to 597 million people in 2022-23. Now, there is a need to ensure a steady shift of workers from agricultural to non-agricultural sectors and from informal to the formal sectors.

The Budget has thus provided a solid foundation for robust medium-term growth. With an anticipated real domestic investment rate of 35% and a net inflow of capital of about 2% of GDP, a real GDP growth of 7% plus appears feasible. Given that global growth is slated to remain sluggish in the range of 3-3.3% over the next two to three years, this would be a major achievement, establishing India’s position as a global leader.

The writer is Chief Policy Advisor, EY India, and Member, Advisory Council to the 16th Finance Commission. Views are personal