Every Finance Minister faces the same question every year: how to spend more without either taxing more or borrowing more or both. The pressure to spend more, tax less and borrow less is especially great when the ruling party has lost its majority and inflation is snapping at its heels.
The full 2024 Budget had to be prepared under precisely these circumstances. It’s remarkable that it has pulled off this rope trick quite successfully. The Opposition will carp but that’s okay. That’s what an Opposition is for.
The bottomline is that the fiscal situation is nicely under control despite higher infrastructure, welfare and defence spending, the three bottomless pits.
Some of this nice fiscal showing is because of the ₹2.1-lakh crore transfer by the RBI of its surplus. Some is because of dividends from the public sector. Some of it is because of higher tax revenues.
But a very large part is because of excellent cash flow management. For that the Ministry deserves praise.
As far as this Budget’s expenditure proposals are concerned, it’s the usual blah. There’s absolutely nothing to be said about the choices made. It could be this or it could be that.
Finance Ministers always remind me of a grand aunt who would sit us kids down and apportion out the food with some silly story or the other. The basic idea has always been diversionary.
Severely disappointing
Nice things said, it’s severely disappointing that apart from minor and meaningless cosmetic tinkering with the income tax slabs the Budget shows the customary tax cowardice of the Modi years. He has left the tax rates that P Chidambaram introduced unchanged. That’s a great endorsement.
But the need of the hour was to reduce rates for people earning between ₹20 lakh and ₹1crore a year because it’s these people who drive consumption.
Not just that. An overwhelming proportion of these people earn between ₹25-₹50 lakhs a year. To tax them at 30 per cent is patently unfair. It shows a basic ignorance of the changed sociological circumstances. These rates make no allowance for the health, education, transportation, communications and entertainment costs of the new urban families.
The economic point, in the end, is this: it’s not how much you take away. It’s how much you leave in their hands to spend. Besides it’s not just the tax; it’s also inflation that erodes the amount for those whose incomes are not inflation indexed.
There’s a lot of other tinkering as well that’s informed by an outdated worldview which holds that the rich should be taxed harshly — without defining rich. This is taxation by moral and political criteria rather than economic criteria. That ridiculous tax on credit card spends abroad last year exemplified it.
‘Suit-boot’ impact
The political orientation of the Modi tax policy continues to be driven by the “suit-boot” jibe of 2014. The fear those words induced in Modi has now been reinforced by the election result of 2024. But while it’s one thing to swing and miss, it’s quite another not to swing at all.
The thing is the poor are not significant economically, only politically. And it’s outdated to juxtapose the poor against the rich because the rich are also insignificant economically. What matters is the middle class. No political party cares for it.
But good economics with a decent distributive approach must not be middle-class blind. There must be tax sensitivity that’s not expressed solely through fiddling with the slabs. If political messaging is an important aspect of budgets, tax rates too must be lowered.
It’s hard not to conclude that a great opportunity has been missed by Modi — once again. Elected for the third time and in the first Budget of his third term, he could have decisively changed the mood of the country. And he has, for the worse.