Budget 2024: Key challenges before the government

All budgets are inherently a balancing act. The common man wants more money in their pockets while the government would want to earn and keep more. The Finance Minister is expected to roll out large salary increases for government employee salaries or offer liberal subsidies on food or fuel. At the same time, money needs to be spent on infrastructure to build for the future. The government could run deficits in order to boost spending in the economy but hawks in the form of rating agencies would swoop down and hand over a credit downgrade.

As FM Nirmala Sitharaman rises to present the Union Budget for one last time in this government’s tenure, here are some key challenges that she will face.

Job creation

The Indian economy has faced challenges when it comes to job growth because of both local and global factors.

While steps such as demonetisation and GST helped push formalisation of the economy, the COVID pandemic was a further blow to the informal sector.

Besides, the growth of technology has created high-end jobs while automating low-end ones, pushing income inequality.

However, after several years of slow growth, the past few years have seen an uptick in job creation with one report claiming India added 5.2 crore jobs between FY20 and FY23.

But as the link between economic growth and job creation continues to fray, economists would eye what the government is doing to give a leg-up to the informal sector, which accounts for 90% of jobs in the country.

The labour force participation rate rose to 58% in FY23 from nearly 50% in FY18 but female participation remains among the lowest in the world, and any uptick is often led by rise in rural participation -- a sign that economic distress is forcing women to come and work on the farm.

A well-articulated policy on job creation would help outline what the government is planning to do to meet challenges it faces from each of three factors: formalisation, technological adoption and low female participation.

Fiscal consolidation vs welfare spending

The word populism has gotten a bad rap as governments are often accused of using it as a dole in the form of unnecessary welfare schemes to put more money in the hands of people, often with an eye on short-term outcomes such as election results.

However, with the advent of schemes as direct benefit transfer, the government has managed to use welfare spending intelligently, efficiently and in areas where it is most needed, such as cooking gas or housing subsidy or since COVID, free food grains.

This tightrope walk has allowed the government to ramp up capital expenditure and infrastructure spending in a big way.

Following the COVID pandemic, the government loosened its purse strings by increasing its deficit beyond what it had planned. In the last Budget, the FM outlined a deficit target of 5.9%.

While rating agencies have not frowned upon the relaxation of the deficit target, they have said fiscal consolidation is coming in the way of a ratings upgrade – India currently sits at the lowest grade in the investment category and just above the junk grade.

Privatisation and divestment

Over the past several years, the government has aggressively cleaned up bank balance sheets with public sector bank gross NPAs falling from a peak of nearly 15% in FY18 to 5.5% in FY23.

However, it has shied away from going for outright bank privatisation – the most it has done so far is a mammoth consolidation where 27 banks were merged into 12.

Bank privatisation is a contentious issue that comes with its own challenges but it would help the market if a clear statement is made on whether and by when the government plans to achieve its aim of bringing down public sector banks to 4.

This is not to say the government has zero wins when it comes to privatisation. It scored a big one with the sale of Air India, something that has dragged on for decades.

But even on the divestment front, the government has missed its fund-raising targets nearly every year. However, with market conditions being highly favourable, it remains to be seen if the government will up the ante by bringing more PSUs to the exchanges beyond what it has already done.

Conclusion

The choices made in Budget 2024 will not only impact the economy in the short term but will also have far-reaching implications for India's future growth and development. Balancing these considerations will be key to delivering a budget that addresses the nation's immediate needs while laying a strong foundation for sustained progress.