The Upcoming Union Budget

Source-This post on The Upcoming Union Budget has been created based on the article “Will a changed political landscape affect the budget?” published in “The Indian Express” on 20 July 2024.

UPSC Syllabus-GS Paper-3- Government Budgeting.

Context- The article discusses how the upcoming Union Budget must navigate between political pressures and economic challenges. In uncertain electoral times, governments may prioritize new welfare programs and increase spending on social sectors.

Key considerations for the government in the upcoming budget include balancing multiple pulls and pressures, deciding between welfare spending, capital expenditure, or deficit reduction. The government may pursue a bold policy agenda in response to the changed political scenario.

What are the various challenges faced by the Indian economy?

1) Growth Concerns– The 8% growth figure raises questions about the economy. Growth may not be as strong as claimed, and distribution issues may be even worse. The 5.6% fiscal deficit of the Centre highlights that government spending remains a crucial driver of the economy.

2) Employment issues– More people are becoming self-employed in small roadside businesses and doing unpaid household work. Many unemployed and underemployed youth are turning to trading and gaming for income.

3) Limits of welfarism: Recent election results have raised doubts about the effectiveness of welfare programs. Providing public goods does not always influence voters as expected.

4) Manufacturing Sector and Trade Policy – Using a mix of tariffs and subsidies through schemes like PLI (Performance Linked Incentives) has shown limited success beyond mobile phones. (Only Apple). The manufacturing sector has remained stagnant at around 17% of GDP for the past two decades.

Read More- Increasing PLI allocation will not be enough

5) Trade policy contradictions: India’s self-reliance drive contrasts with global supply chain integration efforts. This is highlighted by its decision not to join RCEP while competitors did.

6) Investment Scenario– Corporate investments are stagnant despite government efforts. Promoting national champions like Reliance Industries is a key strategy.However,it may not substantially increase investments or create jobs.

7)  Current Account Surplus– India had a current account surplus in the last quarter of the previous fiscal year. While some view this positively, it shows that domestic savings were higher than domestic investment. This meant that instead of borrowing internationally for local investments, India’s savings went abroad. This is not ideal for a capital-deficient country like India.

8) Consumption demand patterns: –Subdued investments and a weak labor market, where millions are stuck in low-productivity jobs, suggest that overall consumption demand is likely to stay weak. For ex-FMCG sales are low, two-wheeler sales are down from pre-pandemic levels, and entry-level car sales have declined.

What should be the way forward?

1) There is a pressing need for structural changes to stimulate job creation.

2) India requires a diverse set of companies to drive growth in capital expenditure, beyond depending solely on national champions such as Reliance.

Question for practice

What are the various challenges faced by the Indian economy?