Cover Story     

Published: July 31, 2024
Updated: July 31, 2024

Budget 2024-25 Exercise to Save Modi 3.0 Govt

Expectedly, the new Modi government’s first budget has allocated the lion’s share of resources to crucial allies Chandrababu Naidu’s AP and Nitish Kumar’s Bihar, leaving little leeway for other states and aam aadmi-friendly budgetary provisions.

Among the general public, only salaried taxpayers have got a little sop with standard deduction increased from Rs 50,000 to Rs 75,000 in the new tax regime. Senior citizens hoping for an increase in deductions under the old tax regime have been left high and dry.

Sellers of immovable property will have to think twice, as the benefit of indexation for calculating LTCG has been removed.

On the flip side, the focus on youth employment has incentives like wage support up to Rs 15,000 for first-time employees, and a monthly allowance of Rs 5,000 and onetime assistance of Rs 6,000 to company interns.

The growth-oriented budget comes with an estimated fiscal deficit of 4.9% of GDP, which is lower than the previous year’s actual fiscal deficit of 5.6% of GDP.

Union Finance Minister Nirmala Sitharaman’s record-breaking seventh consecutive budget, which is incidentally the Modi.3 regime’s first budget, is not a product of undiluted economics but an exercise prompted and coloured by political expediency with the aim of saving the Modi.3 government. Almost all the budgetary provisions in some way reflected the outcome of the recent general elections when Narendra Modi and his Bharatiya Janata Party faced a considerable rebuff from the people.

The main thrust of the budget was clear: to placate Chandrababu Naidu of Andhra Pradesh and Nitish Kumar of Bihar, with whose numerical support Mr Modi could become the Prime Minister for the third time. Instead of taking a pragmatic view of the overall economic development of the country, the budget has provided the lion’s share of financial assistance to AP and Bihar, ignoring other states.

Union Finance Minister Nirmala Sitharaman’s recordbreaking seventh consecutive budget, which is incidentally the Modi.3 regime’s first budget, is not a product of undiluted economics but an exercise prompted and coloured by political expediency with the aim of saving the Modi.3 government. Almost all the budgetary provisions in some way reflected the outcome of the recent general elections when Narendra Modi and his Bharatiya Janata Party faced a considerable rebuff from the people.

The main thrust of the budget was clear: to placate Chandrababu Naidu of Andhra Pradesh and Nitish Kumar of Bihar, with whose numerical support Mr Modi could become the Prime Minister for the third time. Instead of taking a pragmatic view of the overall economic development of the country, the budget has provided the lion’s share of financial assistance to AP and Bihar, ignoring other state

JOBS THRUST

The budget has presented three schemes to promote employment. These will provide: (i) wage support up to Rs 15,000 to first-time employees registered with EPFO; (ii) incentives to employees and employers in the manufacturing sector for their EPFO contributions; and (iii) reimbursement of up to Rs 3,000 per month for employer EPFO contributions per new employee for two years.

At the same time, a scheme to upskill 20 lakh youth over five years will be launched. Under this, 1,000 industrial training institutes will be upgraded to meet the skilling needs of the industry. Another scheme to provide internship opportunities for one crore youth in 500 top companies has been announced. Under this, a monthly allowance of Rs 5,000 and a one-time assistance of Rs 6,000 will be provided to the beneficiaries. Companies can bear the training cost and 10% of the internship cost from their CSR funds.

Elaborating, the Finance Minister revealed that the government schemes will cost the exchequer around Rs 2 lakh crore for roughly 41 million people – it will pay one month’s wage up to Rs 15,000 in three instalments to every new person entering the workforce, incentivise employers up to Rs 3,000 a month for two years towards their EPFO contribution for new employees, offer a direct incentive to both employer and employee for their EPFO contribution for the first four four years, skill two million people over five years, and offer internship opportunities at 500 top companies for 10 million people over five years. The focus will be on generating employment, a key grassroots grievance that hurt the BJP in the recently concluded polls. In addition to these schemes, the government also announced upgradation of 1,000 Industrial Training Institutes, government-backed skilling loans up to Rs 7.5 lakh, and financial support for loans up to Rs 10 lakh for higher education in domestic institutions, making up its second thrust area – jobs.

Ms Sitharaman made further commitments to women, including working women’s hostels and cheap loans. “For promoting women-led development, the budget carries an allocation of more than Rs 3 lakh crore for schemes benefiting women and girls,” she said.

A third priority of the budget was maintaining fiscal discipline. It lowered its fiscal deficit target for the current year to 4.9% of the Gross Domestic Product, from the 5.1% target set in the interim budget in February and from 5.6% in the previous year. It lowered its gross borrowing target to Rs 14.01 lakh crore but said it still plans to spend a record Rs 11.11 lakh crore in capital expenditure on long-term infrastructure.

“The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5% next year. The government is committed to staying the course. From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP,” Sitharaman said.

A revenue windfall this year has boosted the government coffers, giving it ample resources to boost spending while narrowing the fiscal deficit. The Reserve Bank of India paid the government a record Rs 2.1 lakh crore dividend this year, while tax revenues surged on the back of a stronger economy.

Taxes were a fourth key area. The government raised the short-term capital gains tax – on stocks held for less than one year – to 20% from 15%, and the long-term capital gains tax – for stocks held for over one year – to 12.5% from 10%. The step was seen as an effort to arrest the frenzy that has propelled the markets to record highs, a day after the economic survey sounded a word of caution on galloping markets. It caused a temporary slide in India’s benchmark indices but they recovered shortly after and ended the day flat.

Ms Sitharaman reduced customs duties on items ranging from cancer drugs, mobile phones and chargers to gold, critical minerals and seafood. She also tweaked the new tax regime slabs and raised the standard deduction limit from Rs 50,000 to Rs 75,000. “As a result of these changes, a salaried employee in the new tax regime stands to save up to Rs 17,500 in income tax,” she said.

There were a string of other announcements – more funding for agricultural research, a movement towards small nuclear reactors and solar power for energy security, credit guarantee schemes and cheap loans for micro, small and medium enterprises, expanded urban housing, a new scheme for tribal people, and digitised land records – that hinted that the government was thinking about initiating next-generation reforms and a simplification of the tax framework.

BUDGET HIGHLIGHTS

ª% Expenditure: The government is estimated to spend Rs 48,20,512 crore in 2024-25, 8.5% higher than the actual expenditure in 2023-24. Interest payments account for 24% of the total expenditure, and 37% of revenue receipts.

ª% Receipts: The receipts (other than borrowings) in 2024-25 are estimated to be Rs 32,07,200 crore, 15% higher than the receipts in 2023-24. Tax revenue, which forms a major part of the receipts, is also expected to increase by 11% over the receipts in 2023-24.

ª% GDP: The government has estimated a nominal GDP growth rate of 10.5% in 2024-25 (i.e., real growth plus inflation).

ª% Deficits: The revenue deficit in 2024-25 is targeted at 1.8% of GDP. This is lower than the actual revenue deficit of 2.6% of GDP in 2023-24. The fiscal deficit in 2024- 25 is targeted at 4.9% of GDP, which is lower than the actual fiscal deficit of 5.6% of GDP in 2023-24.

ª% New Schemes: Rs 62,593 crore has been allocated to the Department of Economic Affairs for New Schemes (for which details are not yet not available). The allocation is for capital expenditure, and accounts for 6.8% of the total capital outlay.

TAX PROPOSALS

New income tax regime: Tax slabs under the new tax regime have been modified. The proposed tax structure is shown in Table 1. Standard deduction for salaried individuals and pensioners is proposed to be increased from Rs 50,000 to Rs 75,000 under the new tax regime. Deduction from family pension is also proposed to be increased from Rs 15,000 to Rs 25,000. Pension contribution will be tax deductible for the employer and the employee up to 14% of the salary (from 10% earlier).

ª% Capital gains tax: Short-term capital gains tax on listed equity shares, units of equity mutual funds and REITs/ INVITs is proposed to be increased from 15% to 20%. Longterm capital gains tax will be levied at 12.5% across all asset categories. This was earlier levied at 10% on listed equity shares, equity mutual fund units, and REITs/INVITs, and at 20% with indexation for other assets. Indexation for calculating long-term capital gains for property, gold, and other unlisted assets will be removed.

Listed financial assets held for more than a year will be classified as long term while unlisted financial assets and all non-financial assets must be held for at least two years to be classified as long term. The exemption limit for long-term capital gains from listed equity shares, equity mutual funds, and business trusts will be increased from Rs 1 lakh to Rs 1.25 lakh. Buyback of shares will be treated on par with dividends.

ª% Securities transaction tax: Securities transaction tax levied on sale of options in the securities market will be increased from 0.0625% to 0.1% of the option premium, and on the sale of futures will be increased from 0.0125% to 0.02% of the trading price.

% Tax deducted at source: The rate of tax deducted at source (TDS) is proposed to be reduced from 5% to 2% for several items such as payment of insurance commission, payment of life insurance policy, rent payment, and payment of commission or brokerage. TDS on payment of proceeds of sale by an e-commerce operator to an e-commerce participant will be reduced from 1% to 0.1%.

ª% Direct Tax Vivad Se Vishwas Scheme, 2024: The scheme will be introduced for settlement of tax-related disputes. It provides for leniency in payment of the disputed interest or penalty on the tax amount.

ª% Equalisation levy: Equalisation levy of 2% of the proceeds received by a non-resident e-commerce operator for supply of goods or services will not be applicable from August 1, 2024.

Changes in customs duty: Customs duty rates have been changed for several goods. It has been reduced for goods such as: (i) gold and silver, and (ii) mobile phones and their chargers/adapters. Certain items used in the textile, steel, and capital goods sectors have been exempted from customs duty. Customs duty has been increased for solar glass (used in manufacture of solar cells or modules) and certain chemicals.

Angel tax: The Income Tax Act provides for the levy of tax on unlisted companies for receiving funds in excess of the face value of their shares. This provision will cease to apply.

Disclosure of foreign assets: The Black Money Act, 2015 has penalties for not declaring assets held abroad. This will not apply to movable assets up to Rs 20 lakh.

Immunity from benami transactions: The Prohibition of Benami Property Transactions Act, 1988 makes the ‘benamidar’ and the beneficial owner equally culpable. In order to encourage a ‘benamidar’ to turn approver, provision is being made to provide immunity.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 requires the Central government to progressively reduce its outstanding debt, revenue deficit and fiscal deficit, and to give three-year rolling targets for these. Notably, the medium-term fiscal policy statement has not provided rolling targets for budget deficits since 2021-22. In her budget speech, the Finance Minister reiterated the government’s aim to reduce fiscal deficit to below 4.5% of GDP by 2025-26.

Fiscal deficit is an indicator of borrowings by the government for financing its expenditure. The estimated fiscal deficit for 2024-25 is 4.9% of GDP.

Revenue deficit is the excess of revenue expenditure over revenue receipts. Such a deficit implies that the government needs to borrow funds to meet recurring expenses which may not provide future returns. The estimated revenue deficit for 2024-25 is 1.8% of GDP. This is lower than the actuals of 2023-24 (2.6%). In 2024-25, revenue receipts are estimated to register a growth of 14.7% which is higher than the 6.2% growth in revenue expenditure. Primary deficit is fiscal deficit less interest payments. It is estimated to be 1.4% of GDP in 2024-25. Outstanding liabilities is the accumulation of borrowings over the years. A higher debt implies that the government has a higher loan repayment obligation over the years. The Centre’s outstanding liabilities in 2024- 25 are estimated to be 56.8% of GDP. Outstanding liabilities had declined from 51% in 2012-13 to 48.1% in 2018-19. From 2019-20 onwards, outstanding liabilities have been increasing, and reached a high of 61% in 2020-21, and have moderated thereafter. Guarantees given by the Centre stand at 1.2% of GDP at the end of 2022-23. Interest payments as a percentage of revenue receipts increased from 37% in 2013- 14 to 42% in 2020-21. It is estimated to be 37% of revenue receipts in 2024-25.N.D.A. HURRAHS

Expectedly, NDA members welcomed the budgetary announments, with high praise coming from the Bihar and Andhra Pradesh Chief Ministers. “From the beginning, we had requested special assistance for Bihar. In response, they have announced help in several areas. We are doing a lot of work, and we will receive additional support in many aspects, which will be beneficial,” said a beaming Bihar CM Nitish Kumar. The Prime Minister averred that “the budget will act as a catalyst in making India the third largest economic power in the world and will lay the foundation for a developed India.”

However, the Opposition flayed the budget, pointing out that not only did it not contain specific schemes for other states but also held little for Maharashtra and Haryana, two states ruled by the BJP that are slated to go to the polls later this year. The Congress also alleged that two of the five schemes announced for young people were lifted from its manifesto.

RAHUL GRIPE

Taking to X (formerly Twitter), Leader of the Opposition Rahul Gandhi said, “Kursi Bachao (save your chair) budget. Appease Allies: Hollow promises to them at the cost of other states. Appease Cronies: Benefits to AA with no relief for the common Indian. Copy and Paste: Congress manifesto and previous budgets.

Stock prices shoot-up to new Highs after an initial slump

Just like the fortunes of the Narendra Modi-led BJP group changed from distinct disappointment with winning only 240 seats in the Lok Sabha and then turning into delight with Chandrababu Naidu of Andhra Pradesh and Nitish Kumar of Bihar agreeing to support Mr. Modi and ensuring him a majority in the house enabling him to form a government, stock markets also first got unnerved with the hike in the capital gains taxes for the short term and long term duration and benchmark indices - Sensex and Nifty fifty tumbling down by around 2 per cent each but subsequently on second thoughts, the sentiment buoyed up and indices shot up to new all-time high levels. Of course some analysts find the late spurt in stock prices intriguing.

Thus despite initial debacle markets got recovered and welcomed the Union Budget 2024 with cheers by closing at new all-time highs, that too after surprisingly absorbing the dumping by FPI and FIIs. In the previous budget for FY23-24 a record capex of Rs 10 lakh crore and many other policies were announced, which have boosted the performance of several sectors and overall markets, as a result Indian equities turned buoyant and witnessed a strong rally in the last one year.

Data available from a research organisation showed that the Indian equity index BSE Sensex has surged 23 percent in the past 12 months till July 26. While broader market benchmarks BSE MidCap and BSE SmallCap have outperformed the Sensex and gained 58 percent and 57 percent, respectively.

Besides sectoral benchmarks such as BSE PSU (gained 93 percent), BSE Realty index (rose 87 percent) and BSE Capital Goods index (surged 69 percent) were the top gainers in this rally.

Explaining the change in the Singh mood of the market, Mr. Amar Dev Singh VP of pAngel One, said overall, the Budget has tried to address concerns about jobs, slump in demand and to tackle these issues higher provisions have been made to boost spending in the agri sector, affordable housing, skilling and providing incentives for employment generation. All these measures are aimed to ensure medium-term inclusive growth as a significant percentage of the population is facing hardships in their day-to-day life to alleviate their current situation.

With the government's focus on job creation and revival of urban and rural demand, Mr. Dev Singh adds this budget is expected to spur demand across sectors, with the FMCG, infrastructure, manufacturing, housing, agriculture and power to gain significantly on the back of higher allocations for these sectors. With higher allocation to the rural segment, an anticipated uptick in demand is expected going forward which could have a positive impact across many sectors.

Referring to the impact on PSUs, he maintained that Indian PSUs have emerged stronger over the past few years, on the back of strong growth numbers, be it power, energy, rail, defence, banks etc. and the turnaround in many of the PSUs have been nothing short of spectacular. Stronger balance sheets and sizeable orderbooks for the foreseeable future, bodes well for these companies. However, going forward, execution shall hold the key for future performance. At the same time, investor interest has been extremely favourable towards PSU stocks, which is reflected in many of the PSU stocks in the manufacturing sector and some have turned out to become multi-baggers. The Budget holds promise for several of these companies so the way forward looks exciting.

As regards the outlook for PSUs going ahead he says that any growth trajectory in excess of 20-25 percent is always challenging for any corporate and PSUs are no different. As the base becomes larger, generating higher returns becomes more difficult. Maintaining such high growth will only be possible as long as the global and domestic macros remain supportive and the interest rate cycle remains at the lower end to spur growth and sustain the current momentum. In this market FMCG, IT, Pharma, Infra, housing are few sectors that remain attractive in this bull market. However, it is imperative that investors stay cautious at current levels as many stocks in these sectors are trading at higher valuations, which might not justify entry at current levels. But on any correction or in an SIP mode, it would still be fine to have a closer look at quality names in these sectors.

According to a market expert, the budget favours demand stimulus and employment generation after focusing on the supply side of the economy for many years. The budget proposals such as a cut in effective tax under the new Income Tax regime, subsidy for hiring interns by the corporate sector, and higher allocation for rural infrastructure and affordable housing is expected to put more money in the hands of consumers. This will translate into higher consumer demand which is positive for companies in sectors such as FMCG, consumer durables and two-wheelers.

The announcement for a cut in basic import duty on mobile phones and accessories, and gold and silver are also pro-consumer moves and is positive for jewellery and telecom companies. A turnaround in consumer demand is also expected to have a positive rub-off effect on retail lenders.

Says Mr. Ridham Desai of Morgan Stanely, "the budget focused on fiscal consolidation while maintaining momentum on capex and creating a foundation for a sustained medium-term growth path through schemes for skill enhancement and job creation. The lack of populist spending is in line with our expectation, although the increase in capital gains tax for equities is against our expectation of no change. We remain constructive on Indian equities with a bias for largecaps over small and midcaps. We are overweight financials, consumer discretionary, industrials, and technology and underweight other sectors."

According to analysts of JM Financial, "higher allocation towards rural development and agriculture as well as various schemes for employment and skilling of youth is expected to boost both rural and urban consumption for FMCG products."

Analysts at Emkay Global are overweight on FMCG, consumer durables and information technology sector and expect headwinds for companies in industrial and financial space.