The Prime Minister and the Finance Minister did most things right in a budget with a very short shelf life

It is paradoxical that at a time when budgets have less and less influence on fundamental economic trends, the media and political noise surrounding budget presentations has only intensified and become pointless.

The total government budget expenditure as a proportion of GDP (gross domestic product) fell during Prime Minister Narendra Modi’s first term (2014-2019) from 13.1 per cent in 2014-15 to 12.25 per cent in the last year, says economist Rathin Roy (read ).

Budget spending rose sharply during his second term due to the collapse in GDP during the COVID-19 pandemic, but from a peak of 17.7% in 2020-21, the first year of the COVID-19 pandemic, total budget spending has now fallen to 14.7% of projected GDP in 2024-25. It will continue to fall unless we see a miracle of growth and tax revenues.

The relative irrelevance of the budget for the economic situation is particularly visible this year, an election year, as spending will be relevant only for about six months, or even less.

Once Finance Minister Nirmala Sitharaman’s budget is passed by the end of this month, there will be only six months left until the next budget is presented on February 1, but in the January-March quarter of 2025, most spending will depend not on budget proposals but on already visible trends in revenue and expenditure.

Ministries will be asked to reduce or accelerate spending once the Ministry of Finance gets a solid picture of these trends in the October-December quarter. And if we assume that most budget programs will not be implemented for at least a month after the finance bill is passed by parliament, we are talking about another effective loss of a month this fiscal year.

That said, let’s be clear on one thing: there’s nothing directionally wrong with the budget proposals. Key proposals include focusing on jobs and skills, maintaining the pace of infrastructure spending, and fine-tuning capital gains and tax deductions at source rates.

Proposals were also put forward to facilitate the flow of credit to micro, small and medium-sized enterprises (SMEs) and build more houses for the urban poor.

At the same time, the fact that the budget is sticking to the path of fiscal consolidation despite having to meet the wishes of its new coalition partners is truly amazing.

That is, Modi deserves full credit for helping his finance minister avoid the temptation of handing out goodies all over the place in the wake of Bharatiya Janata Party’s defeat in the general elections and the upcoming assembly elections in three states (Maharashtra, Jharkhand and Haryana).

The prime minister refused to buy himself an election victory in February by passing a temporary budget. This time, he has remained true to his conservative fiscal instincts.

Most of the criticisms of the budget proposals are misguided and politically motivated. At best, they are only partially true. Let’s take them one by one and refute them.

Onethe allegation is that Bihar and Andhra Pradesh have been favoured over other states. This is nonsense because most of the budget is for the entire country and not just these two states.

But how can it be morally wrong to funnel funds to the poorest state in the country? Or to help Andhra Pradesh build a new capital? This is about righting the wrong that the Centre failed to honour its commitments to the state when the old Andhra Pradesh was divided in 2014.

Amounts allocated for Purvoday States are not helping only Bihar; they are also going to Jharkhand, Odisha and West Bengal. The same is the case with flood control measures, which also cover Himachal and Uttarakhand.

Most importantly, the spending won’t happen in this truncated fiscal year. It will be spread over several years. Other states may receive their contributions next year.

Two, Former Reserve Bank of India Governor Raghuram Rajan, who is a political opponent of the Modi government, has made one valid criticism of the employment programs. He said in a television interview that while the programs should be tried, one cannot assume they will work. He is right, but he is also wrong.

The budget includes three job plans and two professional development programmes. It is unlikely that all will fail because in practice the government has tried many different things at some scale, and if one or two work, the next budget can increase funding to make them work even better.

To get them off the ground, the government should have a jobs and skills sherpa whose sole job is to monitor the implementation of these schemes and propose real-time adjustments where necessary. He must also be able to get the states on board.

It is a mistake to believe that the centre must do all the hard work when it is the states and local bodies that are the real administrative actors resisting reforms that could boost employment and employability.

ThreeThere has been some criticism that no real relief has been given to salaried taxpayers, but that is not true. The new tax system, which gives very few deductions, effectively raises the tax-free limit to Rs 7.75 lakh (including the increased standard deduction level this year).

It may be appropriate to automatically index exemption levels from next year, but most political parties prefer to keep this decision to themselves as it allows them to plan exemptions for the election.

There has also been criticism that changes to the capital gains tax regime for various asset classes will affect markets and real estate. The long-term capital gains (LTCG) tax on listed shares has been raised to 12.5 per cent, while that on real estate has been reduced to the same level.

But residential real estate has also lost its earlier benefit of cost indexation. The securities transaction tax (STT) on futures and options trades has also been raised, as has short-term capital gains on stocks.

But the criticism is exaggerated. For two reasons. If the long-term goal is to increase employment, there can be no excessive encouragement of income from capital investment as opposed to labor.

If the top tax rate for individuals is over 30 percent, and that applies to income from fixed deposits and debt funds, what is the point of taxing long-term capital gains at one-third of that rate?

Of course, venture capital needs to be encouraged, but the real problem is the huge gap between the rates of return on capital and labor. Some closing of this gap is justified and will actually encourage companies to hire more workers, especially when automation of jobs is also a viable option.

Reliefs for SMEs and municipal construction also fit into the same employment theme. SMEs and startups (which benefit from the elimination of the business angel tax) will be the engines of employment growth, not large companies.

The key point to note is that all budget plans – whether they are about jobs and skills, support for SMEs, urban housing or higher taxes on capital gains – aim to tip the balance in favour of work.

There are more good things than bad about a budget, and the only caveat is simple: it must focus on execution, not just spending.