As the 2024 Lok Sabha elections loom, the finance minister gears up to unveil the interim budget on February 1. Despite India’s standing as the world’s fastest-growing major economy, the intersection of economics and politics remains delicate during election years. Historically, budgets in election years tend to lean towards populism, often diverting from the reform agenda.
Economists foresee the upcoming interim budget striving to strike a balance between populist measures and fiscal prudence. The goal is to rein in the fiscal deficit, targeting 5.3 percent and 4.5 percent of the GDP by the conclusion of 2024-25 and 2025-26, respectively. This task becomes intricate as populist demands may push allocations for infrastructure, agriculture, and the rural sector higher.
Key focus areas for a balanced budget:
Emphasis on promoting emerging sectors, research and development, and manufacturing is pivotal. Measures to reduce duty on raw materials for agricultural machinery could spur growth, aiding farmers and potentially boosting exports.
Income tax rationalization:
The finance minister’s commitment to prioritizing the welfare of youth, women, farmers, and the poor should reflect in rationalizing income tax slabs. This includes considerations for increased basic exemption, standard deduction, higher 80C limits, and an annual LTA exemption.
Investment in healthcare and education:
With a meager 2 percent of GDP spent on public healthcare, the budget should address the need to allocate at least 3-6 percent to enhance India’s Human Development Index. A shift towards universal health coverage and increased spending on education can unlock India’s demographic dividend.
To bolster India’s manufacturing share in GDP, proposals for reducing duty on agricultural machinery raw materials could benefit farmers. Additionally, real estate and pharmaceutical sectors seek specific reforms for growth.
To improve the trade to GDP ratio, a strategic approach involves negotiating trade agreements with major global economies. Lowering import tariffs and signaling intent for global trade partnerships in the budget can instill investor confidence.
Green technologies and electric vehicles (EVs):
In line with climate commitments, a concessional tax regime for green technology investments and continuity of the FAME II subsidy for the EV industry are anticipated. Calls for GST rate reduction on lithium-ion batteries aim to promote EV adoption.
Research and Development:
India’s low spending on scientific R&D (0.7 percent of GDP) requires a significant boost. The budget should signal a commitment to gradually increasing R&D spending to 2.5 percent of GDP, fostering innovation and economic value addition.
Ease of doing business:
The budget should address the need for India to break into the top 10 nations for ease of doing business. Regulatory certainty and simplified regulations, especially for sectors like fintech, are vital for attracting international investors.
As the budget speech unfolds, businesses, especially those eyeing a shift from China, look for signals that India is ready for seamless operations and welcomes foreign investment with regulatory clarity.