India's Viksit Bharat dream: NDA government should revamp spending, adjust taxes, and focus on transformative welfare programs

The national Democratic Alliance (NDA), headed by a vastly experienced Prime Minister Narendra Modi, will present its first regular Budget of the third term this month.

Finance Minister Nirmala Sitharaman, while presenting the Interim Budget in February, had promised to present the road map for Viksit Bharat (Developed India) in this upcoming one. What is the vision of Viksit Bharat? What fundamental policy framework and programmes will be needed to lay the foundation and road map?

Vision of Viksit Bharat

India will not become viksit (developed) by becoming the third largest economy if the people of the country don’t earn enough to afford a decent living.

The best way to define Viksit Bharat is to adopt the goal of making India a high-income country.

The World Bank classifies a country as high-income if its average per capita income exceeds $13,846 a year. As many as 83 countries are currently in this bracket. Fifty-four countries are in the upper middle-income bracket ($4,466–13,845). India is not in these two categories.

With a per capita income of about $2,500, India is part of the lower middle-income group of 54 countries ($1,136–4,465), along with its South Asian neighbours.

To coincide with 100 years of Independence, we must deliver on the goal of making India a high-income country by 2050 to make it truly viksit. This will also provide a reasonable window of 25 years, across five governments, to realise the vision.

Repurpose expenditures

Expenditure policies in the second term of the Modi government were built around four basic pillars.

First, the government believed in the efficacy of capital expenditure (capex) to generate growth and committed over `30 lakh crore to it, with the last three years witnessing a capex of about `23 lakh crore.

Second, the government, while publicly castigating freebies, fell for them. Including cash transfers to farmers, free foodgrains to 810 million people, and virtually free fertilisers, the government spent `10.35 lakh crore in 2023–24 (Revised Estimates) on welfare.

Third, expenditures on public goods and services were kept on a tight leash (only `8.23 lakh crore in 2023–24 RE), neglecting the green agenda completely.

Fourth, the government did not seem to care for the runaway increase in non-productive expenditures like interest payments and pensions, which expanded massively to consume almost 37.5% of the FY24 Budget as per the Revised Estimates. The NDA government must fundamentally repurpose expenditures.

Instead of allocating a significant part of capex to unproductive trophy assets, particularly the Railways, the government must extricate itself from such wasteful capex and encourage the building of efficient infrastructure assets in the private sector, supported by liberal viability gap funding.

The production-linked incentive (PLI) schemes should be thoroughly reviewed by retaining and significantly expanding four PLIs on key digital age industrialisation priorities—electronics, communications, solar cells and modules, and batteries. All other PLIs in traditional and mature industrial sectors should simply be disbanded.

Welfare expenditures should be structured around two strategies. Building on the highly effective strategy of the first term—investment in life-changing social investments—the government must scale up assistance to poor households for building houses, accessing tap water, 24x7 electricity and gas/solar cooking hob/stove, and full-scale health services/insurance. All other subsidies and freebies should be converted into cash payments, linked only to specified outcomes.

The government must also undertake investments and programmes to help India transition to low-carbon technologies to become a net-zero country much before 2070.

Revenue side

India currently finances only about 60% of its expenditures from revenues. In addition, the government has also been depriving states of their due share of central taxes.

To raise resources, the government must make the exemption-less option in both corporation tax and personal income tax the only mode of taxation. The 15% tax regime for new manufacturing companies should be done away with. Personal income tax slabs should be rationalised by raising the minimum threshold to `7.5 lakh and the 30% slab to `30 lakh.

It is time for the government to consider introducing new taxes—one on wealth with real estate, financial assets, and jewellery assets, including the increase in valuation during a year—at a small rate of 3-5%. It should also bring a law to tax pollutants and carbon emissions on a negative value-added basis.

The privatisation and disinvestment agenda, which was completely grounded in the second term, needs to be resuscitated in a big way. The government must keep only a few public sector leaders—like SBI, NTPC, PowerGrid, and ONGC with its subsidiary HPCL and GAIL—under a professional sovereign asset management company and sell the rest.

To be fair to the states, the government should discontinue extensive cesses and surcharges on petroleum products, income taxes, and customs duty. The share of states in gross tax receipts should be taken close to 41%.

Fiscal deficit

India cannot sustain public debt-funded expenditures to attain doubtful growth, as such growth tends to be short-term and results in the bubble bursting in a few years.

The NDA government ran a humongous fiscal deficit in its second term of over 6% of GDP on average. The government has a fiscal deficit consolidation goal of 4.5% by FY26. This goal should be reduced to 3% of GDP, to be achieved by FY29.

The road to a high-income India by 2050 is not going to be easy. A Budget re-focussed on the priorities suggested above will surely lay the foundation. 

The author is former Finance Secretary and observer of economic policy. Views are personal