On July 23, Finance Minister Nirmala Sitharaman will present the first Budget of Prime Minister Narendra Modi’s third consecutive government. This budget presentation is a quinquennial event in India, occurring once every five years.
The Union Budget is presented twice in this period: initially as an interim budget in February by the outgoing government, followed by a full budget by the newly-formed government. Sitharaman had already presented an interim Budget for the fiscal year 2024-25 on February 1.
The key difference between the interim and full Budget to be presented on Tuesday is the political landscape. While the BJP remains in power, it no longer holds a majority on its own. The major question is how this altered political mandate will impact India’s budget, which can be discerned by comparing it to the interim Budget numbers.
Understanding The Budget
During Budget season, one encounters a plethora of terms such as capital expenditure, tax buoyancy, non-debt capital receipts, fiscal deficit, revenue deficit, and effective revenue deficit. This jargon can be overwhelming.
At its core, a Budget is a report where the government informs Parliament (and the nation) about its financial health. This includes detailing income, expenditure, and borrowing.
Since the Budget is presented at the transition between financial years, it outlines how much money the government raised in the previous year, where it was spent, and the amount borrowed to cover any deficits. It also provides projections for the upcoming financial year, indicating expected earnings, planned expenditures, and anticipated borrowing to cover any shortfall.
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Why Does The Budget Matter?
An average Indian citizen might question why they should care about the government’s finances, arguing that it’s not their money. This lack of understanding about the Budget often limits public interest to seeking tax relief or cash handouts from the government.
However, the budget fundamentally deals with the citizen’s money. The government’s borrowing (fiscal deficit) directly translates to a debt that citizens and future generations will eventually have to repay.
Therefore, it’s crucial for citizens to monitor various aspects such as: who the government taxes and by how much, the government’s spending priorities, whether it allocates sufficient funds for education and health, if it subsidizes those in need, and how it plans to balance its income and expenditure.
How Does A Union Budget Influence The Economy?
Union budgets differ significantly from household budgets because they have the power to influence the entire country’s trajectory. Beyond the goal of avoiding excessive borrowing and debt, the government can use the budget to shape the behavior of Indian citizens and businesses in two main ways.
Firstly, the government can adjust who it taxes and by how much. For example, if the government wants to promote businesses in a specific economic sector — believing this will leverage India’s demographic advantages, create jobs, and boost prosperity — it can reduce the tax rate for that sector. Notably, reducing the tax rate doesn’t necessarily result in lower revenues; increased economic activity spurred by the lower tax rate can lead to higher overall revenues.
Secondly, the government can modify its spending priorities and amounts. Although the budget covers only one year, budgets presented at the start of a new government term (as is the case now) can indicate a broader shift in spending strategies.
For instance, one of the major macroeconomic policy shifts during the last government term (2019-2024) was the emphasis on incentivizing private sector investments. The government achieved this by offering a historic corporate tax cut while simultaneously increasing its own infrastructure spending.
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