One can read it as a pivot toward labour-intensive growth, which includes the enhancement of human capital

This was the first budget of the government led by Prime Minister Modi in his third outing as the PM. It has laid the contours for Modi 3.0 economic policies, which need to get the nod from NDA allies too.  It was Finance Minister Nirmala Sitharaman’s record seventh presentation. Even though the budget proposals will apply for six months, before a new one is presented next year, they articulate the economic vision of the government. Clearly the emphasis is on job creation, skilling and training, apprenticeships for youth, encouraging small businesses. There is also a mention of India’s energy challenge as it makes a transition from coal and fossil fuels to more green and sustainable energy sources. Hence the mention of nuclear power with public private partnership is important, and so is the policy of stored water energy.

The major thrust of the Union Budget proposal for 2024-25 is on job creation and helping small businesses. The former is through employment and skilling incentives, and the latter is by providing collateral free loans to MSME’s and enabling access to export markets.  There is also an increase in tax on capital gains. In some ways one can read this as a pivot toward labour-intensive growth, which includes the enhancement of human capital.  For the past few years, the Union government has consciously raised the share of spending on infrastructure such as roads and airports.  These hard assets have been created at a rapid pace and are visible. Public spending on infra has been a significant driver of growth. But job creation has not been keeping pace, and rural wages have been stagnating. Small businesses which generate jobs have been struggling. The micro reality behind health macro has been that consumer spending is growing slower than GDP, which is worrying. Instead of only providing incentives to production and revenues, the government has now focused on job creation and providing incentives for job creation.

India needs to invest in human capital massively, for long term, sustainable and inclusive growth. That investment needs to reach a benchmark of 6 percent of the GDP, which is twice of where it is now. This investment will come both from private and public resources. Public funds are necessary for funding primary education and partly secondary education. This is because of tremendous social spillover benefits that go far. But, college education and beyond including skilling and training cannot be funded by taxpayers. This is because the benefit of higher education and skills accrue largely to the individual and only secondarily to society at large. The spillover benefits of skilling and college degrees and diplomas are in terms of entrepreneurship, innovation and job creation, but are still not a strong justification to provide it all free. The key challenge for skilling India, is that the vast majority of the youth hungry to be trained cannot afford the true cost of quality education. Also, most of the skilling happens as on-the-job learning. Hence the best way is to incorporate it into a national apprenticeship program, which has portable accreditation.  Even the internships for ten million youth in top tier companies will be a step toward learning by doing. The fee for skilling and higher education should be borne by the student, the primary beneficiary. It is here that the Budget does well in ensuring easy and inexpensive access to student loans. In the coming years this should be a dominant way of funding higher education in India.  Similarly collateral free loan schemes have been announced for small businesses, apart from government provided credit guarantees. The small businesses have also been helped in linkage via e-commerce to export markets. Since MSME’s provide the lion’s share of value added in industry, exports and employment, this thrust is very welcome.

Beyond jobs, skilling and MSME’s the prominent macro feature is fiscal responsibility. The FM chose to use half of the fiscal bonanza received from the Reserve Bank of India to reduce the deficit. The commitment to fiscal consolidation is commendable. India is an outlier when it comes to debt servicing (one third of tax revenues going to meet interest expenses) hence keeping fiscal promises and prudence is very important. If anything, the assumptions about next year’s tax revenues look conservative.  India needs a comprehensive re-look at income tax strategy. The direct tax net needs to be much wider and the slabs should not go from zero to the top rate within a span of just a few lakh rupees. The top tier must kick in at high incomes, say above 1 crore. But exemptions must go.  A new comprehensive economic framework for next gen reforms is forthcoming as the FM said. The new framework for reforms must position India in an advantageous position to exploit global value chains. Hence the trend should be to lower import duties across the board. The import duty on gold was cut from 15 to 6 percent, because a lot of duty leakage was happening via the route of duty-free imports from UAE into GIFT city. Besides high duties on precious metals are eventually counterproductive since they invite smuggling.  It was also good to hear about future looking initiatives such a promoting private-public partnerships in small modular nuclear reactors and on the space economy. And also, a hard realistic assessment of India’s difficult transition path away from fossil fuels.

The higher taxes on capital gains might be temporary spoilers for the stock markets. But India’s macro performance stands out in the world for its resilience and high growth, with moderate inflation. With policies to incentivise job creation and skilling, along with fiscal consolidation there is no reason why high growth cannot be sustained. Sooner or later the financial markets will acknowledge this strength.

(Dr. Ajit Ranade is a noted Pune-based economist) (Syndicate: The Billion Press)