In today's Finshots, we will be explaining the Interim Budget in 5 minutes... If you're a speed reader.
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The Story
1 budget down in 2024. And we’ve still got 1 more to go.
What???
Yup, if you heard Finance Minister Nirmala Sitharaman present the budget yesterday, you’d have noticed it was quite a short one — just 58 minutes. That’s because she presented only an interim budget or a vote-on-account budget.
Let us explain.
2024 is the year of the general election. And this voting process to elect the central government could begin in May. But, our new financial year starts in April. That means the incumbent government still has to manage its expenses and revenues till the votes are counted and a result is declared. Because they can’t get too confident and assume they’ll win another term no?
So, the main objective of an interim budget is to simply present a stopgap solution till D-Day. But once the new government is in place or the incumbents stay on, they’ll present a full-fledged budget. That’ll probably be sometime in July.
Now the question — what did this interim budget have in store for us?
Anything on Personal taxes?
Nope. Absolutely nothing.
Because elections are around the corner, it might have been tempting to indulge in some big move to appeal to voters — such as slashing taxes. But it had none of that. Taxes were left untouched.
Hopefully, July’s budget will bring a better deal for the taxpayers.
But there was something about withdrawing old direct tax notices?
Yup, the Finance Minister proposed to withdraw disputed income tax demands dating back as far as 1962. You know, the kind of disputes where the tax department might say the person has claimed incorrect tax deductions or they've under-reported income.
And here's the thing. In 2020 the World Bank placed us at 115 out of 190 countries on the ‘paying taxes’ metric. Maybe that low rank was partly due to our dispute resolution mechanisms?
Because as of 2017, nearly ₹4.96 lakh crores have been locked up in income tax claims. And 66% of them related to disputes below ₹10 lakhs. Cases get dragged on in courts for an average of 6 years and eventually, the Indian income tax administration loses almost 9 out of 10 disputes.
So, it not only wastes precious court time, but also increases litigation costs.
That's probably why this Budget suggested waiving off small tax demands of ₹25,000 or less with certain conditions up until FY15. And the government claims it could help a whopping 1 crore taxpayers!
Pretty sure it'll reduce the burden on the government and courts too.
Now let's look at the big picture — the Macroeconomic one.
One way to gauge our economy's health is by looking at something called the fiscal deficit.
The government earns revenue primarily through taxes — stuff such as income tax, corporate tax, and GST. It then uses this money to spend on infrastructure and other welfare schemes. But more often than not, there’s a mismatch between the earnings and expenses. Expenses trump income and the gap is called the fiscal deficit. To fund the shortfall, countries borrow money.
So, looking at the fiscal deficit number is crucial. Because if the deficit is large, it means the country isn’t able to manage its income and expenses effectively.
Anyway, when the government announced the budget last year, they said they expected the fiscal deficit to be 5.9% of GDP in FY24. But yesterday, they said that they had performed better than expected. They revised the fiscal deficit for the year to 5.8%.
And the government is even more confident that the deficit will drop to 5.1% of GDP in FY25 (April 2024 to March 2025).
So, how did the government manage to do this you ask?
For starters, they actually received more taxes than expected from people like you and me. Their initial estimate was for ₹9 lakh crores. And they now think they’ll get over ₹10 lakh crores.
Also, it looks like they’re set to receive quite a bonanza of dividends from the RBI and other state-run companies. While the government initially expected ₹91,000 crores to flow into its coffers, the current documents say they’ll probably get nearly 70% higher than that!
With that, the government has been able to stay on track and can continue to focus on splashing cash on capital assets. These are assets that can yield income — roads, bridges, railways that kind of stuff. They’re assets that can create jobs. In fact, spending on such capital assets has a multiplier effect. It provides quite a boost to economic growth.
Also, since the government plans to keep their deficit in check for FY25, it also means they won’t have to borrow more money by issuing bonds. In fact, it could be the first time in 3 years that we see a fall in the yearly gross borrowings.
And lower borrowing is a good sign for the economy. It shows that the government is managing to be prudent with its spending habits. And investors (both domestic and foreign) like that. They’ll feel more comfortable investing their money in the country.
And to propel the economy, there's Railways.
‘Improving efficiency’. That's the mantra here.
The plan is to have 3 dedicated railway corridors to transport resources like minerals and cement, connect ports, and reduce high traffic density.
It could be a big deal because the huge Dedicated Freight Corridor Project worth nearly ₹1.2 lakh crores was actually approved in 2006. It aimed to connect eastern, western, northern and southern India so that freight can seamlessly move between these zones. As of 2023, the work on 80% of the project has been completed. And once fully operational, it could reduce congestion on our roadways which carry a whopping 60% of the country’s freight.
So another push in this direction can help us get to our goal of halving freight costs from about 15% of the GDP as of now.
There’s something for passenger trains too.
The Finance Minister proposed to convert 40,000 existing traditional train bogies to Vande Bharat standards. You know, the fancy Western looking trains everyone has been raving about.
But there's one thing to keep in mind. Although Vande Bharat trains are comfortable and attract tourism, The Hindu reported that these trains often run at much lower speeds than they're capable of. And the culprit here may be the quality of railway tracks. So we can't just have shinier trains, we need shinier rail tracks too. And hopefully, some part of the budget goes into fixing that.
Also, there's a renewed focus on Housing.
You probably already know about the Pradhan Mantri Awas Yojana (PMAY) which was a scheme to provide 'Housing for All' by FY22 through subsidised loans.
In 2021, the government went ahead and extended a part of this scheme until FY24. It was called PMAY-G (Gramin) and focused on rural houses. The target was to build approximately 3 crore houses with basic amenities by the end of this financial year. And since the government says we’re almost close to achieving the target, the Budget has a new proposal ― an additional 2 crore houses over the next 5 years to accommodate more families.
And they want to introduce a scheme to help the middle class (we don't know how that's defined) move out of rented or congested homes and build or buy their own.
And here’s why it matters. As of 2012, India was short of 1.9 crore houses. This shortage has gone up by over 50% as of 2018. The latest estimates could be even higher considering that we’re now the most populated country in the world.
Now, there are many reasons why this is happening. People might be evicted from slums and often may not be given the right compensation or land space to build homes that they can afford. Or the speed of construction could be slow if the underprivileged don’t have enough funds to spend on house construction.
So more houses could help tackle the housing crisis as long as subsidies reach the beneficiaries on time.
Ok, but tell me one more thing — what’s this ‘Viksit Bharat’ the Finance Minister mentioned nearly 10 times?
Ah. That’s actually not a new scheme. It’s just a mission to transform India into a developed country by 2047 — our 100th year of independence. The Prime Minister has spoken about it last year. So the budget is trying to make sure everyone’s aligned towards this vision.
Viksit means Advanced (as per Google search anyway), by the way.
But how can we achieve this target?
Well, no one said it’s going to be easy. Some experts estimate that our GDP needs to grow by almost 9% every year for the next two decades to reach this promised land.
And that seems like a tall order.
But that doesn’t mean we can’t try. In December, we wrote something about innovation in India. We said,
…if we want to be a developed or high-income country by 2047 as Prime Minister Narendra Modi hopes, then we need to increase our per capita GDP. It should rise 10x to hit $21,700 by then. And maybe increasing spending on R&D could be one way in which we can get there.
[...]
The usual idea is to dole out incentives. We already allow certain tax deductions for R&D. So maybe it’s about doubling down on that.
And it looks like someone in the Government thinks alike because the Finance Minister just announced something massive — a corpus of ₹1 lakh crore with a fifty-year interest-free loan so that the private sector can concentrate on research and innovation in emerging domains.
That could be a real game-changer if executed right, don’t you think?
And here's a final bonus for you.
The Budget even gave a brand new makeover to the meaning of GDP and FDI!
GDP stands for Governance, Development, and Performance.
FDI is First Develop India.
You’ve got to hand it to the folks who come up with such alternatives, eh?
Anyway, that's the interim Budget and you can be sure we'll cover the full budget when that happens.
Until then...
Correction: An earlier version of the story mentioned that small tax demands of ₹25,000 or less were being withdrawn up to FY14. This has now been corrected to FY15. Also, 40,000 bogies and not trains will be converted to Vande Bharat standards. We regret the error.
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