The Budget exercise is a complex intertwining of political-economy compulsions with multiple policy trade-offs required to achieve often conflicting economic objectives, while constrained by limited revenues. Despite these difficulties, a hallmark of the Budgets of the past few years has been stability and predictability in approach and outcomes, and we believe this Budget too will largely adhere to the contours expected by stakeholders.

Key to this continuity will be further progress on the path of fiscal consolidation. The fiscal deficit (FD) has been steadily reduced from 9.2 per cent of the GDP in FY21 (this was due both to higher expenditures and nominal GDP having shrunk that year) to a budgeted 5.1 per cent for FY25 in the Interim Budget (IB). The earlier FY24 FD had also been scaled back from the 5.8 per cent budget estimate to 5.6 per cent (and is likely to be further reduced owing to the robust tax collections in FY24 and lower spends on subsidies). The Economic Survey forecasts FY25 GDP growth at 6.5-7 per cent.

Even assuming additional expenditures of 0.4-0.5 per cent of GDP in FY25 and some scaling back of tax revenue growth, there might be a further cut in the FD. This will enable a further reduction in the FY26 FD from the target terminal rate of 4.5 per cent of GDP to an aspirational 4.2-4.3 per cent. Together with a projected State governments’ aggregate FD of 2.7-2.8 per cent, this will bring the aggregate government FD tantalisingly close to the 7 per cent goal set by a global ratings agency as a precursor to a sovereign ratings upgrade.

A ratings upgrade will be a big achievement, the first since 2007 by this agency. A continued focus on capital spending will reinforce this by improving the quality of expenditure.

The Budget will also be keenly watched for the government’s plans and roadmaps to tackle some of the structural concerns which will impede the goal of sustaining a 7 per cent-plus growth for the next 25 years. The Survey lays out a medium-term growth strategy focusing on six key areas: boosting private investment, expansion of MSMEs, agriculture, financing of the green transition, education-employment gap and building state capacity.

Building state capacity and facilitating last mile implementation of projects will be the most critical enabler for these focus areas.

First, despite the current debates on the numbers, a shortage of well-paying jobs looms large, and is likely to worsen unless corrective policy steps and adequate resources are deployed. Unfortunately, while fiscal policy (for instance, corporate tax relief for jobs) and budget outlays (for apprentice programmes) will help mitigate this by providing the right incentives, the real fixes will need much deeper structural and regulatory reforms, particularly in the most employment intensive sectors.

The second, and more immediate, ask of the Budget is to boost private sector consumption, whose growth has remained low at an average 4.6 per cent since FY21, versus 7.2 over FY14-FY19. While higher exemption limits for personal income tax slabs (as is widely expected) will boost sentiment, the heavy lifting in the short term will be judicious increases in outlays on specific expenditure heads. Visibility on robust consumption is a powerful incentive for private investment.

Lagging rural consumption, in particular, has been a worry for some years. While higher inflation might be one factor, higher budget spends on some key programmes will more effectively increase disposable incomes for low-income beneficiaries. Some of these heads include PM-KISAN, MNREGA, PM-AWAS, Gram Sadak and rural drinking water. Increasing the annual transfers for PM-KISAN beneficiaries will augment incomes of the poorest farmers.

Third, a more powerful intervention at a micro, household level is to deploy expanded social safety nets by increasing the scope of insurance programmes to low-income households and micro enterprises, reducing their rising earnings uncertainty. Mitigating income losses — rising out-of-pocket spends on medical emergencies, contract jobs with no social security benefits, widening lay-offs, weather related disruptions, etc. — are likely to boost confidence and increase consumption.

The government has already established multiple insurance programmes but their scope and coverage need to be expanded. The Ayushman Bharat scheme to insulate low-income households against the rising costs of medical treatment and the life and disability insurance for workers in unorganised sectors are excellent safety nets. The data generated by Digital Public Infrastructure can help these “contingent guarantees” target income support to vulnerable households, at minimum possible cost to the exchequer.

Focus on small units

Fourth, an expanded focus on micro and small enterprises is likely to have a strong growth and consumption multiplier. Recently released survey data showed 6.5 crore unincorporated enterprises employing 11 crore workers in 2022-23. These miniscule enterprises need to be integrated into the supply chains of larger formal businesses. While multiple enabling measures are needed, the primary need is increased access to credit.

Unfortunately, the micro risks make it difficult for banks and even most NBFCs to extend credit to this ecosystem, yet development of these enterprises is a public good. While encouraging greater participation of new-age micro lending institutions, the government needs to sponsor a credit guarantee fund, which can take on some of the lending risk, and reduce borrowing costs.

Sustained growth will need integrated structural reform. While the Budget has a key role in allocating resources and aligning incentives, this will need to be reinforced by multiple other initiatives involving industrial, trade, labour, energy, credit and other policies.

The writer is a Senior Fellow, Centre for Policy Research. Views are personal. (Through The Billion Press)