The Budget - heart and mind in the right place

The Union Budget presented on July 23rd promises to deliver India's broader growth and jobs agenda. L&T Group Chief Economist Sachchidanand Shukla provides essential insights.

The Union Budget reiterated its intense focus on key priorities, which include boosting job creation, advancing skilling, rural economy, fiscal consolidation, and remaining steadfast on capital expenditure-led growth with a promise to maintain strong fiscal support for infrastructure over the next 5 years.

To understand the Budget better, we need to first be cognizant of the context and the backdrop in which it was presented. The Bank for International Settlements in its annual report on the global economy warned that governments should cut back on borrowing to ease one of the biggest threats to the stability of the global financial system and support efforts to tame inflation. It also cited the U.K. episode in 2022 wherein investors jettisoned government bonds leading to a spike in borrowing costs, weakening the currency and hurtling equities into a tailspin.

Domestically, the backdrop was that of a near ‘goldilocks’ economy with robust GDP growth and low inflation. For the entire fiscal year 2024, GDP growth has been revised upwards to 8.2% which makes it the fourth consecutive year of 7% plus growth. Importantly, the RBI recently raised India’s FY25 real GDP forecast to 7.2% from 7% earlier in its last meeting.

In the Budget, the central message had to be continuity. And there had to be continuity in more ways than one.

First, there had to be continuity in the need for fiscal consolidation as highlighted by the BIS. The government chose to follow a path of a faster fiscal deficit reduction even with the RBI’s dividend bounty. The continuation on the path of fiscal consolidation is an absolute must and not the least because S&P has said that India can get a sovereign rating upgrade in two years if fiscal deficit falls to 4%.

Why is the fiscal prudence angle so important? India’s fiscally responsible budgets have gone a long way in ensuring macro stability and keeping bouts of volatility away from interest rates and the INR. Also, bear in mind that the global backdrop is fragile, and India’s general government debt is still amongst the highest in the world. In fact, when it comes to general government debt, India ranks 120th out of the 137 countries rated by S&P. In the BBB- rated cohort, the average net general government debt at 38% as a percentage of GDP in 2023 was less than half of India’s 86%.

Second, there was continuity by way of prioritisation of capital expenditure and infrastructure development, investments in manufacturing via a correction in the customs duty structures and rates, as well as measures to improve ease of doing business. These will help sustain revival in private investments.

Importantly, the emphasis on hard infrastructure remains intact with an allocation of Rs11.1 lakh crore. Given that FY25 is going to be truncated year i.e., the first quarter being impacted by election and govt. formation etc., the allocation seems prudent and more importantly, shows faith in the capital expenditure-led growth strategy. The budget also announced investment-ready “plug and play” industrial parks with complete infrastructure in or near 100 cities, in partnership with the states and private sector, by better using town planning schemes. Twelve industrial parks under the National Industrial Corridor Development Programme are also envisaged. Importantly, phase IV of PMGSY will be launched to provide all weather connectivity to 25,000 rural habitations.

The sustained focus on infrastructure promises a positive trend for the sector's growth and returns. Investments in power, railways, road corridor projects and the small pivot to nuclear in the energy mix are expected to benefit Larsen & Toubro, which is well-positioned to capitalise on these initiatives.

Lastly, one of the standout features of this budget is its focus on soft infrastructure by harnessing the power of human resources and the demographic dividend. There is a new ELI scheme (employment linked scheme) that will complement the PLI (production linked scheme). The government will provide one month's wage to new entrants in all formal sectors and is expected to benefit over 2 cr. The Govt will also reimburse EPFO contributions of employers. There are also measures to address the skilling gap with a plan to provide skilling to over 20 lakh youth, and one thousand ITIs are to be upgraded. The budget has proposed rental housing for industrial workers in PPP mode. There are steps to facilitate higher participation of women via women friendly measures. All these measures backed with an allocation of Rs. 1.48 lakh crore, will help alleviate the problem of lack of skilled labour for India Inc.  It will help create an employable workforce and indirectly help spur consumption demand via income augmentation. It will help address, to an extent, the skew towards capital intensive nature of employment by creating more jobs and will also spur formalisation of the labour force. The abolition of the Angel tax will give a fillip to start-up activity and help augment job creation. Reinforcing the softer infrastructure theme, the health ministry allocation has also been upped 13% YoY.

The key signal from the Budget is that of policy continuity - not just to entrepreneurs and investors sitting on the fence but also to rating agencies. This augurs well for the economy. Further, it will also encourage private sector participation as an epilogue to public capex spending, to deliver the country's broader growth and jobs agenda.