Union Budget: 2024-25 ft. Windmill Capital

Introduction

The Union Budget (2024-2025) had four focus areas:

• ‘Garib’ (Poor)
• ‘Mahilayen’ (Women)
• ‘Yuva’ (Youth) and 
• ‘Annadata’ (Farmer)

There were a slew of measures announced during the speech and we shall be covering them in detail to help you decode all the lengthy documents.  

But first up, let’s understand the broad overview of the Indian Union Budget. 

Navigating the Complexities of the Budget

Understanding the Budget can be challenging due to its technical jargon, vast scope, and political considerations. But, grasping the basics is crucial for citizens to comprehend government policies, economic impact, and implications for individual finances.

To understand the chart above, let us understand the budget in the simplest terms. A budget is like a plan that shows how much money you expect to earn and how you’re likely to spend it. It’s like making a list of all the things you need to pay for (like bills, groceries, and other expenses) and figuring out how much you can afford to spend on each item. Just like you budget your own money to make sure you don’t overspend, the government also makes a budget to manage its finances and decide where to allocate funds for different things like education, healthcare, infrastructure, and more.

Let’s understand where the money comes from – we call that revenue source.

Revenue Sources (left side of the chart):

The government’s main source of money comes from taxes, both direct (like income tax) and indirect (like GST on goods and services).

Other contributors include customs duties (tax on imports), excise duties (tax on production), and the state’s share of taxes collected. These taxes make up the bulk of what’s called the Gross tax.

The government also earns money from non-tax sources like interest on loans it gives out, dividends from investments, and other income.

Apart from taxes, the government also gets money from borrowing (debt receipts), loans, and investments (capital receipts).

It also collects money from various savings schemes (NSC) and state provident funds. Now, let’s look at where they spend all this money – naturally, we call it expenditure.

Expenditure (right side of the chart):

The government spends a significant chunk on various schemes aimed at different sectors like health, education, agriculture, infrastructure, and social welfare.

This includes funding for specific projects, subsidies on essentials like food, fuel, and fertilizers, and support for economic and social development programs.

Some money is transferred to state governments for their expenses and development projects.

The government also has to pay interest on loans it has taken, pensions for retired employees, and cover the costs of running its offices and programs.

By understanding these revenue sources and where the government spends its money, we get a clearer picture of how public finances work and where taxpayer money goes.

Budget Highlights:

1. Fiscal Deficit Discipline

For FY 2024-25, the fiscal deficit is expected to be around 4.9% of the GDP. Post-COVID-19, we have witnessed a steady decline in fiscal deficit numbers which is a great sign for our economy. In fact, when looked at in hindsight, this fiscal deficit prudence has been one of the key factors behind the strong GDP growth that we have experienced over the past five years. 

Picture the fiscal deficit as a leaky bucket: when the government’s spending exceeds its income, it’s as if more water is pouring out than is coming in, leading to a shortfall that needs to be plugged to keep the bucket (or budget) balanced. A lower deficit indicates better control over government spending and financial health.

2. Productivity & Resilience in Agriculture

Given the agrarian nature of our economy, every Budget speech does feature key highlights on farmers and agriculture. This Budget was no different and the FM announced a slew of measures in this space to augment the progress – 

• The government will conduct a comprehensive review of the agriculture research system to enhance productivity and develop climate-resilient crop varieties. Over the next two years, 1 crore farmers will be introduced to natural farming, supported by certification and branding, through scientific institutions and willing gram panchayats, with 10,000 bio-input resource centers being established.

• Large-scale vegetable production clusters will be developed near major consumption centers, and Farmer-Producer Organizations, cooperatives, and start-ups will be promoted for vegetable supply chains. 

• India’s seafood exports hit over ₹60,000 crore last year, with frozen shrimp making up two-thirds of the total. Financial support will be provided for setting up Nucleus Breeding Centres for Shrimp Broodstocks, with NABARD facilitating financing for shrimp farming, processing, and export. To enhance competitiveness, the FM proposes reducing the basic customs duty (BCD) on certain broodstock, polychaete worms, shrimp, and fish feed to 5%, and exempting customs duty on various inputs for their manufacture.

• The government has allocated ₹1.52 lakh crore for agriculture and allied sectors.

3. Employment & Skilling

As highlighted by the FM, one of the core themes of this Budget revolved around expanding the workforce base and more importantly incentivizing employment and up-skilling. Two key announcements were made in this regard:

• The government will implement employment-linked incentive schemes. For first-time workers in all formal sectors, a one-month wage subsidy will be provided. To encourage additional employment in the manufacturing sector, both employees and employers will receive incentives related to their EPFO contributions during the first four years of employment. The government will reimburse employers up to ₹3,000 per month for two years for each additional employee.

• Additionally, 1,000 Industrial Training Institutes (ITIs) will be upgraded with a hub and spoke model focused on outcomes, and course content will be aligned with industry skill needs. This will provide a major fillip to consumption in the economy. 

4. Inclusive Human Resource Development and Social Justice

Three crore additional houses under the PM Awas Yojana in rural and urban areas in the country have been announced, for which the necessary allocations are being made. Govt has made a provision of ₹2.66 lakh crore for rural development including rural infrastructure. 

5. Manufacturing & Services

When it comes to policymaking, a key trend that one has observed for this government has been the strong push to build in-house capabilities. Combine that with the focus on the growth of MSMEs in India which is an extremely important part of the puzzle in the context of economic growth. Announcements:

• Public sector banks will develop in-house capabilities to assess MSMEs for credit, moving away from external assessments. They will create a new credit assessment model based on the digital footprints of MSMEs, improving upon traditional asset or turnover-based assessments and including MSMEs without formal accounting systems.

• A new mechanism will be introduced to ensure continued bank credit for MSMEs during periods of stress. This will support MSMEs in the ‘special mention account’ (SMA) stage, helping them avoid becoming NPAs through credit backed by a government-promoted fund guarantee. 

• Additionally, steps will be taken to reform and strengthen debt recovery tribunals, including establishing more tribunals to expedite recovery processes.

6. Urban Development

Urban India is experiencing a major transformation. The urban population has experienced a six-fold increase since 1951, growing from 62.4 million to 377.1 million in 2011, and it is estimated that 590 million will live in Indian cities by 2030, which is twice the entire population of the USA. Few announcements to support this influx of population to Urban India – 

• The government aims to develop “Cities as Growth Hubs” through economic and transit planning and organized peri-urban development. For existing cities, a framework for policies, market mechanisms, and regulations will be created. Transit-Oriented Development plans for 14 large cities will be formulated.

• Under PM Awas Yojana Urban 2.0, housing for 10 million urban poor and middle-class families will be addressed with ₹10 lakh crore investment, including ₹2.2 lakh crore in central assistance over five years, and interest subsidies for affordable loans.

• Partnerships with State Governments and Multilateral Development Banks will promote water supply, sewage treatment, and solid waste management projects in 100 large cities, including using treated water for irrigation and tank filling.

7. Energy

The government has been vocal about its intention to gradually move towards sustainable sources of energy. With the objective to augment the progress on the movement towards sustainable sources of energy, announcements were made: 

• The PM Surya Ghar Muft Bijli Yojana will install rooftop solar plants for 1 crore households, offering free electricity up to 300 units per month. A new policy will enhance electricity storage and renewable energy integration through pumped storage projects.

• Nuclear energy will be crucial for Viksit Bharat, with government-private sector partnerships on Bharat Small Reactors, Small Modular Reactors, and advanced nuclear technologies.

• NTPC and BHEL will build an 800 MW commercial plant using Advanced Ultra SuperCritical (AUSC) technology, with government support.

• To aid energy transition and climate change efforts, the exemption list for capital goods in solar manufacturing will be expanded, but exemptions for solar glass and tinned copper interconnects will be discontinued due to adequate domestic production.

8. Infrastructure

The Central Government’s infrastructure investments have positively impacted the economy. It plans to continue strong fiscal support for infrastructure over the next five years, with an allocation of ₹11,11,111 crore this year, equating to 3.4% of GDP. States will be encouraged to invest similarly, with ₹1.5 lakh crore allocated for long-term interest-free loans to assist their infrastructure projects. Private sector investment will be supported through viability gap funding and new policies. A market-based financing framework will be introduced. Phase IV of PMGSY will provide all-weather connectivity to 25,000 newly eligible rural areas due to population growth.

9. Innovation, Research & Development

The government will launch the Anusandhan National Research Fund to support basic research and prototype development. Additionally, a new mechanism will be established to encourage private sector research and innovation, with a financing pool of ₹1 lakh crore. A venture capital fund of ₹1,000 crore will also be created to advance the space economy.

For us to be riding the innovation curve, it is imperative that we have a laser focus on research and development. As a matter of fact, India’s research and development (R&D) expenditure-GDP ratio of 0.7% is very low when compared to major economies and is much below the world average of 1.8%. 

10. Next Generation Reforms

• Land-related reforms will address both rural and urban areas, focusing on land administration, planning, and management. These reforms will be incentivized for completion within three years through fiscal support.

• Rural reforms include assigning Unique Land Parcel Identification Numbers (ULPIN) to all lands, digitizing cadastral maps, surveying land subdivisions, establishing a land registry, and linking it to the farmers’ registry to enhance credit flow and agricultural services.

• In urban areas, land records will be digitized with GIS mapping, and an IT-based system will be set up for property record management, updating, and tax administration, aimed at improving the financial health of urban local bodies.

Conclusion

As we highlighted in our pre-budget writeup, it was expected of the government to maintain continuity on the key focus areas and that is exactly what the FM has delivered.  The likes of infrastructure, affordable housing/real estate, energy, and logistics are all in the front seats and are expected to do much of the heavy lifting. We hope this piece is successful in providing you with a broad overview of the Budget announcements and helps you decipher it a lot better.

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