Many proposals and measures are probably already in the oven for final baking; what is probably left are incorporating last-minute proposals from party members, updating data and putting final touches to finance minister Nirmala Sitharaman’s commentary.
There is another source that the finance ministry may wish to assess while drawing up the final contours of the new government’s first budget: the results of the latest general elections.
The ruling party Bharatiya Janata Party (BJP) had claimed in a meeting of its office-bearers that it would increase its 2019 tally of 303 seats by 67 seats to 370 seats; the BJP, instead, lost 63 seats and ended up having to rely on coalition partners for support. The deepest cuts were delivered by Uttar Pradesh, Maharashtra and West Bengal where its tally dropped by more than half.
Much newsprint and airtime has been devoted to analysing the myriad factors leading up to the 2024 Lok Sabha election results. As usual, there is probably not one particular reason but a multi-layered stack of causes. Three factors, among the multiple strands, make for compelling inclusion in the budget-making process.
One is the fact that even though the Lok Sabha elections are national in character, in reality each state follows different voting patterns. This had become an accepted home-truth for over two decades after the late 1980s, when the era of coalition governments began, and persisted for some time thereafter.
However, over the past 10 years, the BJP’s majority position in Parliament had raised doubts about that thesis. The 2024 general elections seem to indicate that the trend of differentiated approaches has returned, challenging the emerging tenet that the voting behaviour of Indian voters resembles something close to a unified national movement.
This has major implications for fiscal federalism as well, including the central government’s use of funds devolution as a bargaining tool. A 4 July report from Motilal Oswal Financial Services on fiscal data from 20 states (representing 93-94% of all states’ budgets) highlights central parsimony.
The report shows that total fund transfers—tax devolution plus grants—from the Centre to states grew by only 2.5% during 2023-24, against a growth of 4.9% during the previous year. What is even more shocking is the revelation that grants-in-aid from the Centre to states contracted by close to 22% in 2023-24, compared with a modest 4% growth the previous year. This decline in grant transfers during the year is likely to have affected spending across many social sector schemes.
Grants-in-aid are transferred from central funds to states as per Article 275 of the Constitution. Successive finance commissions have tried to remedy the vertical imbalance between the Centre’s taxation powers and states’ spending responsibility by recommending a mix of tax devolution and grants.
However, states have regularly preferred higher tax devolution, a Constitutional right, over grants, which are perceived to be discriminatory. The 15th finance commission, while recommending almost 20% of transfers as grants, may have ended up strengthening those perceptions (and stoking fears of deepening central powers) by introducing performance criteria as a condition for devolution.
The second strong message coming from voters is anxiety over employment and income. Many pre-budget presentations to the government as well as some research reports have recommended state support for labour-intensive industries such as textiles.
The government’s production-linked incentive scheme, to be fair, has employment generation as one of the desired outcomes and textiles is included in the scheme. However, the scheme focuses largely on man-made fibres—such as polyester, acrylic and viscose fibres.
But man-made fibre manufacturers have over the years automated their operations to a large extent and reduced the need for additional manpower. In addition, the scheme has shown patchy progress so far, compelling the government to drop hints of extending it to the apparel sector.
While the apparel segment does hold promise, the handloom industry might be better placed to meet the government’s ambitions on employment generation. The textiles ministry admitted as much in its 2022-23 annual report: “One of the largest in terms of employment potential, handloom industry, with 23.77 lakh looms, plays a very important role in the country’s economy, producing both for domestic as well as international consumption.”
The third signal emerging from ballot boxes relates to capital expenditure. The government has been bold in front-loading its infrastructure investments, but has failed to evoke the desired investment response from the private sector that could have generated additional employment.
Numerous papers and op-eds have pointed to some of the tangible and intangible hurdles holding back higher private-sector investment, and the government needs to heed these. In addition, to make capital expenditure more effective, the government could also look internally and force some key ministries, such as the ministry for development of northeast states, to spend their allocated capital budget.