FM deftly balances social equity with investment growth

 

• In an era of economic uncertainty, a bearish outlook and continued geopolitical turmoil, the Government of India has determined to continue on its steady path

For this budget proposal, there was an apprehension that the development agenda would be traded for social redistribution. However, the FM has sent a strong signal of consistency and discipline to the investing community. In an era of economic uncertainty, a bearish outlook and continued geopolitical turmoil, the Government of India has determined to continue on its steady path. Focus on building self-reliant India, increasing domestic manufacturing capacity, promoting exports and attracting foreign capital.

First, macroeconomic stability continues.

The focus on prudent fiscal management is the most confidence-inspiring aspect of the budget proposal. Adherence to 6.4% fiscal deficit target in FY23 and 50bps reduction in FY24 sets a credible target of 4.5% in FY26. This should have a beneficial effect on the wider economy as it suggests that money will be available for private entrepreneurs. While last year's budget took steps to enhance India's digital and technology initiatives, this year the government has taken a step forward to encourage more investment and employment in the space. The reported 90%+ growth in digital payments also means better tax compliance. At the same time, a stable fiscal regime should support currency stability. These factors favor greater formalization of the economy.

Second, growth driven by capital expenditure

The highlight of this year's budget is the continuity in policy making. The government has increased capital expenditure for the third time in a row. This continues with a 33% increase in capex outlay to INR 10 trillion or about 3.3% of GDP. This will likely enable a stronger infra-based economy in the long term.

The budget will also be remembered for its focus on Tier II/III cities of India, which have got 50 new airports, which will enable a growth multiplier effect. Also, the move to extend interest-free loans to states for one more year is a strong signal of consistency and discipline with an eye on long-term gains rather than short-term SOPs. It will be financed by a Rs 100 billion Urban Infra Fund using the priority sector debt shortfall.

Third, recognition of entrepreneurship as a growth driver.

The budget appreciates and recognizes that the startup ecosystem is a significant high-value job creator in the country. The big announcement to extend the date of income tax benefits to start-ups has brought relief to the sector. The budget announcement also reflects some fresh thinking in initiatives such as the Agriculture Accelerator Fund, public debt infrastructure for credit, and the National Data Governance Policy. As India moves forward to become the third largest start-up eco-system in Ease of Doing Business rankings, there are more steps that need attention. This is featured in low compliance (around 39,000!), enhanced credit guarantee, Nimbler KYC using only PAN, and faster dispute resolution. Finally, in rationalizing duties for handset components, there is something for India's nascent manufacturing