A budget is a Union government’s annual statement of receipts and expenditure. Typically, nothing more and nothing less. Historically, we have been obsessed with budgets because of the expected annual changes in taxes, primarily, though not exclusively, indirect taxes. (For those who smoke, cigarettes invariably vanished before budgets, to resurface with a new price tag). We can complain about the goods and services tax, which is still a work in progress. Too many rates. Too much differentiation. Litigation and classification disputes. Not every good or service is part of GST (petroleum and related products, liquor, tobacco, real estate). An average tax rate lower than whatever was presumed to be the revenue neutral rate. Notwithstanding these warts and blemishes, there is no denying that GST has been a phenomenal success compared to the earlier system (for example, paragraph 115 of the budget speech) and the GST Council is also a remarkable instance of success in Union-state decision-making. That being the case, indirect taxes get knocked out from the purview of the budget. Those changes will happen, but outside the budget and through the GST Council. On this count, the budget loses a bit of its mystique and mystery, as it should. Not all of indirect taxes, at least, not yet. There are import duties. Most economists (not all) will argue that to be competitive, India needs to reduce basic customs duties. In an ideal tariff structure, raw materials should have lower duties than intermediates and intermediates should have lower duties than finished goods. The trouble lies in figuring out what is a raw material, what is an intermediate, and what is a finished good. To compound the problem, there are most favoured nation rates applied to all WTO members and special tariffs for countries with which there are regional trade agreements. Consequently, effective rates of protection get distorted and there is an inverted duty structure. Of course, the problem exists. Should one attempt to do anything about it in a hurry just because a budget is at hand? The finance minister has said (para 117 of the budget speech) that a comprehensive review will be undertaken in the next six months. If we have waited this long, I don’t think six months is a big deal. (There are some minor changes in customs duties in the budget.)

However, there are direct taxes too, personal income and corporate. Waiting for the budget speech, most people have these changes in mind. But there is a big picture story there. We wish to transit to a simplified system where there are no exemptions and where tax rates do not change from year to year. Exemptions enrich chartered accountants and lawyers and increase compliance costs. That’s the reason why a large number of those who submit income tax returns declare zero taxable income. (Taxing agricultural income is a state subject.) This is tax avoidance (availing of legitimate exemptions), not tax evasion. We already have two channels, one with fewer (not zero) exemptions and one with existing exemptions. For both personal income taxes and corporate taxation, I can pick and choose from one of these channels. The budget (para 136 of the budget speech) tells us that 58% of the corporate tax collection came from the simplified regime and that more than two-thirds of personal income taxpayers have moved to the new regime as well. Ideally, in an exemption-less system, the silo between personal income taxation and corporate taxation will break down. (Unincorporated enterprise pays personal income taxes.) We have been waiting for the complete overhaul of the direct tax regime for some time. The budget promises (para 137 of the budget speech) a comprehensive review of the Income Tax Act in the next six months. That being said, the direct tax changes boil down to standard deduction and slabs (for personal income taxation), reduced litigation and appeals, and taxation of capital gains. While I can understand the reasons why these rates were increased, I can’t quite empathise. (I suspect the lack of indexation for real estate is a clause that will be reviewed.)

As one moves away from taxes, there is non-tax revenue and expenditure. Non-tax revenue has primarily been in the form of disinvestment/privatisation receipts. With the emphasis on monetisation of public assets, as opposed to privatisation, one can understand why disinvestment receipts are projected at a conservative Rs 78,000 crore. Revenue expenditure is fixed in the short-run. Not just wages, pensions and interest payments, even subsidies. Every economist will argue capital expenditure (by the government) is superior to revenue expenditure. Particularly during Covid, unlike many countries in the West, India stuck to capital expenditure (read infrastructure). That adds to the productive potential of the economy and in 2024-25, capital expenditure (para 79 of the budget speech) will be 3.4% of GDP. This is as it should be. During Covid, and even before that, the Narendra Modi government did not veer away from the path of fiscal rectitude and fiscal consolidation and this budget is no different. Notice that the nominal rate of growth projected in budget assumptions is 10.5% — it is quite conservative and, therefore, achievable. (The Economic Survey projected a real rate of growth of 6.5% to 7% for 2024-25.) With such a figure, the fiscal deficit/GDP ratio is estimated to be 4.9%, lower than the 5.1% assumed in the interim budget. In other words, we are on track to achieve 4.5% by 2025-26 as was promised. Part of the reason why the numbers look good is that support to Bihar and Andhra Pradesh is through multilateral development agencies, not through the budget.

However, we don’t look at the budget only with the lens of receipts and expenditure. The budget also sets out a reform template for the government. This is particularly important because this is the first budget of Modi 3.0. In the next five years, India should become the third-largest economy in the world (using official exchange rates) and the size of the economy should also cross five trillion US dollars. The budget (para 7 of the budget speech) mentions a nine-point agenda for that terminal goal of ‘Viksit Bharat’ in 2047. While what is said on agriculture, manufacturing and infrastructure is no doubt important, the key is what is flagged under item 9 — next-generation reforms. These concern factors like markets, land, labour and capital. As opposed to employment and skilling, the budget doesn’t say much on labour market reforms. Despite relatively high growth, employment and job creation have been concerns, a fact also underscored by the Economic Survey. Down the years, the employment elasticity of growth has declined; stated simply, not enough jobs are being created. There are multiple reasons for this and not everything can be solved through the budget. That said, there are initiatives on employment, skilling and micro, small and medium enterprises. If it works (land is a state subject under the Seventh Schedule), the most important part of next-generation reforms would be efficient land markets (Unique Land Parcel Identification Number, digitisation of cadastral maps, surveys, land registries and linking land registries to farmers’ registries). This is easier said than done since there is a political economy of resistance too. Not everyone gains from changes and transparency. There are vested interests that lose.

Given all the constraints, this is a pretty decent budget with plausible numbers. It builds on the interim budget and lays down the building blocks for the next few budgets of Modi 3.0.

Bibek Debroy is Chairman, Economic Advisory Council to the Prime Minister. Views are personal