Challenges Following the Union Budget 2024-25 (GS Paper 3, Economy)
Introduction
- The Union Budget for 2024-25 reflects an acknowledgment of the numerous challenges facing the Indian economy.
- The Finance Minister highlighted two significant macroeconomic risks—rising global economic uncertainty and global inflation—which underscore India's vulnerability as an emerging economy.
Fiscal Stability Challenges
Achieving fiscal stability amid economic uncertainty is complex. The government faces two primary competing priorities:
- Creating Fiscal Space for Social and Development Spending: Ensuring adequate funding for essential social programs and development projects.
- Reducing the Debt Burden: Managing and reducing the national debt to ensure long-term economic stability.
Budget Numbers Overview:
- Total Union Budget: ₹48.21 lakh crore, an increase of ₹3.96 lakh crore from the previous year.
- Interest Payments: Increased by around ₹1 lakh crore, representing approximately 25% of the budget rise.
- Central Sector Schemes: Increased by ₹70,000 crore, with additional allocations to states like Andhra Pradesh and Bihar.
- Despite these increases, central expenditure as a percentage of GDP is projected to decline from 15.06% in 2023-24 to 14.77% in 2024-25. Gross tax revenue is expected to remain stagnant at 11.7% of GDP, while the debt-to-GDP ratio is forecasted to remain at around 56%.
Need for Debt Reduction
- Interest Burden: The government’s interest burden has reached ₹11.62 lakh crore. With a significant portion of increased expenditure going towards interest payments, the government faces a tough choice between fiscal consolidation and spending on development.
- Debt-to-GDP Ratio: Although the ratio is expected to decline from 61% in 2020-21 to 56% in 2024-25, the interest payment-to-GDP ratio remains above 3.5%. This persistent high interest burden constrains the government’s ability to increase development expenditure.
- Fiscal Responsibility and Budget Management (FRBM) Act: Amendments to the FRBM Act in 2018 set targets to reduce Union debt to 40% of GDP and general government debt to 60% by March 31, 2025. Given the impact of COVID-19, achieving these targets by the deadline is unlikely. Nonetheless, a clear, time-bound debt reduction plan is essential for maintaining fiscal prudence, especially in the face of high inflation and substantial debt levels.
Next-Generation Reforms
The budget includes several next-generation reforms, particularly related to land, labour, capital, and technology. However, these reforms pose significant challenges:
- State-Level Reforms: Encouraging states to lower stamp duty rates for property registration is complex, as the rates vary significantly across states. These variations are influenced by local property markets, land valuation, and state revenue needs.
- Historical Context: Similar reforms were attempted under the Jawaharlal Nehru Urban Renewal Mission, but disparities in rates persist. The rationalization of stamp duty rates requires comprehensive reforms in the land market, which the Union government can facilitate but not directly enforce.
- State Autonomy and GST Impact: Post-Goods and Services Tax (GST), states have lost considerable fiscal autonomy, making major tax reforms more challenging. The effectiveness of state-level reforms depends on a bottom-up approach, with substantial coordination between the Union and state governments.
Conclusion
- The Union Budget 2024-25 highlights the pressing need for balanced fiscal management, with a focus on reducing debt while ensuring adequate funding for social and developmental needs.
- Next-generation reforms, particularly those involving state-level changes, require careful planning and collaboration.
- A consultative process with states and maintaining fiscal autonomy will be crucial for successfully implementing these reforms and achieving long-term economic stability and growth.
