Budget Boost To Consumption

IN THE RUN-UP to general elections this year, Prime Minister Narendra Modi asserted on several occasions that the first 100-day agenda of his government will have an extra 25 days dedicated to the youth. Those 25 days seem to have been front-loaded in Budget 2024-25 with a ₹2 lakh crore job creation scheme, rural development, agriculture push, fillip to space sector, women-led development, and MSME support forming the foundation stones. The ultimate aim being to boost consumption and kick-start private investment, the two engines of the economy that badly needed a fillip.

“Turning attention to the full year and beyond, in this Budget, we particularly focus on employment, skilling, MSMEs, and the middle class. I am happy to announce the Prime Minister’s package of five schemes and initiatives to facilitate employment, skilling and other opportunities for 4.1 crore youth over a five-year period with a central outlay of ₹2 lakh crore,” finance minister Nirmala Sitharaman says in her Budget speech.

Apart from specific schemes on jobs, agriculture and rural development alone have received an allocation of ₹4.18 lakh crore for FY25, while ₹3 lakh crore has been set aside for women-led growth. “This year, I have made a provision of ₹1.52 lakh crore for agriculture and allied sector. I have made a provision of ₹2.66 lakh crore for rural development, including rural infrastructure,” says Sitharaman.

The government has made a provision of ₹1.58 lakh crore for education, employment and skilling for the current fiscal. For emerging sectors such as space, the Budget has announced setting up of a ₹1,000 crore venture capital fund. Public infrastructure spending, meanwhile, continues to remain in focus with FY25 allocation at ₹11.11 lakh crore, or 3.9% of GDP. The measures are expected to create a ripple effect in reviving the consumption engine of the economy.

Notably, even with continued capex, big-ticket rural, agriculture spending, and coalition compulsion, finance minister Nirmala Sitharaman has kept fiscal management in check by pegging FY25 fiscal deficit at 4.9% — lower than the interim budget level of 5.1%. As a long-term agenda, the Budget also announced an “economic policy framework to delineate the overarching approach to economic development and set the scope of the next generation of reforms for facilitating employment opportunities and sustaining high growth”.

Right after the Budget, Prime Minister Modi reiterated, “The Budget has announced an employment-linked incentive scheme. This will create crores of new jobs. We will create entrepreneurs in every city, every village and every home,” says Modi.

Jobs, Rural Route To Consumption

On the jobs front, Budget 2024-25 announced three employment-linked incentive schemes and two internship programmes with a central outlay of ₹2 lakh crore to benefit about 4.1 crore youth in five years. The first employment-linked incentive scheme for first timers entails one month’s wage as subsidy, subject to a cap of ₹15,000. It will be applicable to fresh workforce with wage/salary less than ₹1 lakh per month. The subsidy will be paid to the employee in three instalments. How much it translates in terms of the amount in the hands of the employee, which, in turn, will get redeployed into the economy in the form of consumption, remains to be seen.

“For jobs subsidy we are targeting one crore people every year for the next two years,” says T.V. Somanathan, finance-cum-expenditure secretary. Through the first scheme therefore, the receivables in the hands of employees will be ₹30,000 crore in the next two years, a part of which will lead to consumption push.

The second employment-linked incentive scheme is aimed at job creation in the manufacturing sector. However, it is largely focused on formalisation with a thrust on employing former non-EPFO enrolled workers. Incentive will be paid for four years, partly to the employer and partly to the employee. Under the third scheme, the government will reimburse EPFO employer contribution up to ₹3,000 per month to the employer for additional employees hired in the previous year.

Under one of the two internship programmes — Internship in Top Companies — one crore youth will be skilled in five years. This scheme can only be availed by those who are not employed and engaged in full-time education. Youth aged between 21 and 24 will be eligible to apply and will get a monthly allowance of ₹5,000 for 12 months. “The introduction of a new internship scheme providing ₹5,000 per month, along with a one-time direct benefit transfer of ₹15,000 to employees registered with the Employees’ Provident Fund Organisation (EPFO), is set to boost employment and economic stability. This injection of financial support is likely to enhance consumer confidence and spending capacity,” says Mayank Shah, vice president, Parle Products.

Apart from jobs, rural spending announced in the Budget is also aimed at boosting consumption in the economy. In fact, ₹2.66 lakh crore earmarked for rural development and infrastructure has various components: Prime Minister Awas Yojana (PMAY) has been allocated ₹54,500 crore for 2024-25, up 70% from ₹32,000 crore in the revised estimate for 2023-24; allocation to Gram Sadak Yojana has been enhanced to ₹19,000 crore, from ₹17,000 crore in RE 2023-24, and the Mahatma Gandhi National Rural Employment Guarantee Programme, which has received an allocation of ₹86,000 crore.

The finance ministry is of the view that the measures will lead to a demand multiplier. “It is difficult to quantify the accretion to demand coming from the measures. The obvious increase is the amount that we have raised. PM Awas Yojana (Rural) and the Gram Sadak Yojana will have a lot of multiplier effect. Traditionally, the capital expenditure multiplier is calculated around 2.5-3 times. In Awas Yojana, it may be slightly lower. There will be a substantial multiplier but I do not have a precise calculation,” says Somanathan.

“Budget 2024-25 charts out the course towards the ambitious Viksit Bharat vision, encapsulating strategic initiatives aimed at agriculture reforms, bolstering employment, enhancing skills, nurturing MSMEs, and invigorating innovation, research & development (R&D) and next-generation reforms. Consumer products and retail sectors should benefit from resultant buoyancy in consumption in rural and urban areas,” say Paresh Parekh and Rahul Kakkad, partners, EY India, in a note on the impact of the Union Budget.

Tax Boost To Consumption

In the concessional tax regime, standard deduction has been increased along with slight relaxation in tax rates, leading to more disposable income in the hands of consumers. “The standard deduction for salaried employees is proposed to be increased from ₹50,000 to ₹75,000. Similarly, deduction on family pension for pensioners is proposed to be enhanced from ₹15,000 to ₹25,000. This will provide relief to 4 crore salaried individuals and pensioners,” Sitharaman says in her Budget speech.

“Boosting disposable income and consumer spending have been achieved through revisions in tax regulations in the Budget. Standard deduction for the new tax regime has been raised from ₹50,000 to ₹75,000, coupled with revised slabs that offer reduced tax rates for income up to ₹15 lakh. This strategic adjustment is designed to put more money in the hands of consumers, thereby increasing spending on a wide range of goods and services, including FMCG products,” says Shah of Parle Products.

“The recalibration of the individual new tax regime would increase disposable income. In a move that heralds cost savings for consumers, the Budget also announces a reduction in import duties on mobile phones, PCBA, chargers, certain precious metals, etc. Abolition of the angel tax regime, coupled with significant simplification efforts — including withdrawal of the equalisation levy, reduced tax rates for foreign companies, and streamlined TDS rates — herald a new dawn for ease of doing business in India,” according to EY India.

Indirect tax tweaks serve as yet another pillar for consumption push in the Budget. To begin with, customs duty cuts on gold and other precious metals will have a far-reaching impact on the jewellery sector, leading to jobs and subsequent increase in consumption. In fact, immediately after the announcement in the Budget — customs duty on the yellow metal was brought down to 6% from 15% with effect from July 24) — gold prices corrected across markets. This bodes well for the upcoming festival season as well. The import duty reprieve will boost job creation, given how labour-intensive the industry is.

“Gold, precious metals and gems and jewellery is a very significant sector for us. It contributes 8% to exports, employing around 50 lakh. Keeping this in mind, import duty on precious metals has been reduced. This will also help curb smuggling witnessed in the last couple of years. But the key motive behind the move is to push exports and give an impetus to employment in the sector,” says Sanjay Malhotra, revenue secretary. “Another announcement was on raw diamonds, of foreign diamond mining companies getting safe harbour rules. Both announcements should be seen in the light of promoting employment in these labour-intensive sectors,” he adds.

Customs duty has also been reduced on cellphones and charger/adapters to 15% from 20%. The duty cut will reduce the price of high-end phones such as iPhone Pro or Google Pixel, which are imported. However, it depends on whether manufacturers pass on the benefit to consumers.

Lending Hand To MSMEs

Micro small and medium enterprises (MSMEs) are the backbone of the Indian economy. MSME gross value added (GVA) in all-India Gross Domestic Product (GDP) was 29.2% in FY22, while its share in the manufacturing output was 36.2%, according to government data. A significant announcement has been made in Budget 2024-25 to ensure business continuity during the stress period — a move that will be of huge reprieve to the significant job-creating sector.

“A new mechanism for facilitating continuation of bank credit to MSMEs during their stress period: While being in the ‘special mention account’ (SMA) stage for reasons beyond their control, MSMEs need credit to continue their business and avoid getting into the NPA stage. Credit availability will be supported through a guarantee from a government-promoted fund,” says Sitharaman.

Besides, MSMEs will be facilitated to get term loans for purchase of machinery and equipment without collateral or third-party guarantee. Public sector banks will also build their in-house capability to assess MSMEs for credit, instead of relying on external assessment.

Forward Looking

In addition to the number of initiatives focused on jobs in the economy, Budget 2024-25 has also outlined some key forward-looking agendas of the government focused on agriculture and energy transition, among others. “Our government will undertake a comprehensive review of the agriculture research set-up to bring the focus on raising productivity and developing climate-resilient varieties. Funding will be provided in challenge mode, including to the private sector,” says the finance minister. The government is looking at implementing Digital Public Infrastructure (DPI) in agriculture for coverage of farmers and their lands in three years.

Self-sufficiency in pulses and oilseeds is another mega plan. “We will strengthen production, storage and marketing. A strategy is being put in place to achieve ‘atmanirbharta’ for oil seeds such as mustard, groundnut, sesame, soybean, and sunflower,” says Sitharaman.

The Budget also announced transit-oriented development plans for 14 large cities with population above 30 lakh, along with an implementation and financing strategy. The government will bring out a policy document on appropriate energy transition pathways balancing employment, growth and environmental sustainability.

Last but not the least, the Centre plans next-generation reforms for “facilitating employment opportunities and sustaining high growth”. “Our government will initiate and incentivise reforms for improving productivity of factors of production, and facilitating markets and sectors to become more efficient. These reforms will cover all factors of production, namely land, labour, capital and entrepreneurship, and technology as an enabler for improving total factor productivity and bridging inequality,” the finance minister says.

The bigger signals from the Budget are that fiscal prudence remains key, infrastructure continues to be a significant focus area, jobs have been accorded the highest priority, while next-generation reforms are in the works.