Budget 2024: Can the government handle rural distress only through subsidies and schemes?

Government is expected to announce measures to push rural growth and spending higher. Image: Shutterstock
 
As the new government presents the Union Budget on July 23—for the first time with its state-level coalition partners—all eyes will be on how it plans to stick to the fiscal consolidation path and, perhaps, pivot towards rural and welfare spending from capex. Besides setting straight its priorities, the Union Budget will have to showcase how it plans to manage the allies’ financial demands and present its vision for the next five years.
 

The government is expected to announce measures to push rural growth and higher spending, as severe weather conditions have impacted farm income while food price inflation has stayed elevated for a longer period of time. Disruptions caused by heat waves and sporadic rains have led to a spike in prices of essential perishable food items like vegetables, pulses and spices. Gradual decline in inflation and revival in rural segment are critical for the new government—for both political stability and economic growth.
 
Though Narendra Modi became prime minister for the third time, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) got to power with a narrower majority and support of alliance partners like the Telugu Desam Party (TDP) from Andhra Pradesh and the Janata Dal (United) or JD(U) from Bihar. This is the first time in the last 10 years that the BJP is running a government without a majority on its own in the Lok Sabha. Therefore, it is assumed that a reduced political mandate will require more political capital to be spent behind passing structural reforms like land reforms and farm sector reforms.
 
“Coalition politics, however, could make it more challenging to pass legislations on the more ambitious aspects of the government reform agenda in areas like agriculture, land, labour and judicial, which are usually out of budgets,” says Nikhil Gupta, chief economist, Motilal Oswal Financial Services. 
 
No doubt, as limping rural consumption requires attention, the government may strive to push the pedal to spur spending in that segment—through subsidies or new schemes. According to Radhika Rao, executive director and senior economist, DBS Bank, the Budget may include programmes covering public health infrastructure, rural housing, farming community and push towards sanitation as well as cleanliness.

Focus on Food

With a vision for turning India into ‘Viksit Bharat’ by 2047, the government is likely to focus on addressing rural stress by improving farm income, housing, roads and employment. Santanu Sengupta, chief India economist, Goldman Sachs, feels the government will use the Budget as an opportunity to make a big-picture statement about the long-term economic policy vision over the next several years, rather than minor stimulus announcements. “These are likely going to align with the government’s development agenda for 2047 (coinciding with the centennial of Indian Independence),” he adds.
 
Sengupta explains why a thrust on food supply chain and inventory management domestically to control price volatility is expected. This is likely to happen through focus on rural infrastructure for better connectivity, incentivising domestic food production, cold storage and food processing.
 
Some of the measures that the government may introduce for rural growth are cold storage facilities, expansion of more efficient irrigation network, grading and sorting units, and food processing. Similarly, it may provide incentives to increase domestic production of edible oil, pulses, vegetables, and fruits, expand dairy co-operatives and fisheries. The government may also reduce input costs of machinery, increase availability of seeds, and give allocation for a price stabilisation fund for vegetables and pulses.
 
“Rural expenditure, welfare spending and transfer payments have averaged around 3 percent of gross domestic product (GDP) in the pre-pandemic period (FY16-20) and are now reverting to the trend after increasing during the pandemic in FY21,” Sengupta says.
 
Rural spending (including the Ministry of Agriculture and Farmers' Welfare, department of fertilisers, department of drinking water and sanitation, Ministry of Panchayati Raj and Ministry of Rural development) grew faster than the total spending during UPA-I and the previous two regimes of the BJP-led government; it was almost stagnant during UPA-II.
 
Within revenue expenditure, Shreya Sodhani, regional economist, Barclays, does not think the government will keep the major subsidies—for food, fertiliser and petroleum—unchanged. The need to increase fertiliser subsidies has also declined as international prices have fallen, she adds.
 
Last November, just ahead of the assembly elections in a few states, the government had announced the extension of its flagship free food welfare scheme for the next five years. This scheme was originally announced during the Covid-19 pandemic. In the Interim Budget, the absolute amount of spending on key subsidies like food, fertiliser and fuel was largely unchanged at Rs3.8 trillion set for FY25 from Rs4.1 trillion in FY24 revised estimates.
 
Giving impetus to urban and rural consumption, Sonal Badhan, economist, Bank of Baroda, expects a slew of announcements to be made to increase farmer income, employment, disposable income of individual taxpayers and savings.
 
“In the final Budget for FY25, we expect the government to announce measures to push rural growth and spending higher. As the earlier Budget was only an interim one, the government could not announce any new policy measures (as per practice), thus we now expect a slew of announcements,” Badhan says.

Also read: Has India Inc survived brutal heatwaves and election-related uncertainty in the April-June quarter?

Push for Housing

According to Sonal Varma, chief economist, Nomura, a focus on the social sector will be possibly one of the key themes of Union Budget FY25, besides lifting consumption, social sector focus, manufacturing boost and infrastructure push.
 
“The government is likely to increase the outlay on rural sector schemes, with subsidies for housing to be increased by Rs230 billion (or 0.07 percent of GDP) as well as increased outlays for rural roads and employment. There are also reports of an expansion of the public health insurance programme by Rs121 billion (or 0.04 percent of GDP) and a renewal of the economic empowerment programme for women [Lakhpati Didi],” Varma adds.
 
In the Interim Budget 2025, allocation in the PMAY (PM-Awas Yojna) was increased to Rs806 billion from Rs795 billion in FY24 Budget estimates. Allocation to MNREGA stands unchanged at Rs860 billion while allocation for the PM Gram Krishi Sinchai Yojana increased by 30 percent in FY25 to Rs113 billion. And Rs700 billion is allocated to Jal Jeevan Mission in FY25.
 
Badhan feels in order to provide further boost to farmer incomes, the outlay of PM Kisan Samman Nidhi (PM-Kisan) can be increased and the government may also push the outlay for MG-NREGA higher to further aid incomes. “Greater focus on PM-AY can also be expected. In addition, to align to the government’s broader vision of sustainable development in the wake of climate change, this Budget may also enhance its emphasis on PM-Krishi Sinchayee Yojna, which pays attention to irrigation management. We may see an increased outlay here as well,” she adds.
  

Influence of State Election

With assembly elections scheduled in key states like Maharashtra, Haryana and Jharkhand in the next few months, Gupta sees a low probability of its influence on the Union Budget. He cites several reasons behind it.
 
First, it is now amply clear that the voting patterns in state and general elections tend to be very different. Second, while the supporters of a rural economy package point to the poor performance of the BJP in Uttar Pradesh and Maharashtra, it does not gel with its exceptional win in Bihar and Madhya Pradesh, explains Gupta. Third, it is highly unlikely that tax incentives for the middle-class and poor Indians would be seen by voters in the election-bound states as exclusive policies for them.
 
“More importantly, a list of a large package of freebies, which was included in the Congress manifesto but was largely absent in the BJP manifesto, reflects the maturity of voters in the country. Lastly, we believe the results of the Maharashtra assembly elections would be largely driven by the state politics, rather than national policies,” Gupta elaborates.
 
Reports suggest the government could introduce reforms that do not require any legislative approval.
 
However, Sodhani feels that the election results and the crowded state election calendar in 2024 will have a bearing on the expenditure mix. “The presence of allies and the BJP's loss of popular support have increased scrutiny on whether the BJP-led government will change its policy focus on fiscal consolidation and switch to increased revenue expenditure, at the cost of capex, with an eye on the upcoming state elections,” she says.
 
The TDP has demanded a package of more than Rs1 trillion for Andhra Pradesh, involving a mix of relaxed conditions for state borrowing, investment in targeted projects (new state capital, irrigation), debt relief and long-term infrastructure loans.
 
JD(U) is demanding a package of Rs300 billion for Bihar, along with further headroom to borrow with no preconditions. The JD(U) wants funding for targeted projects (airports, metro lines, medical colleges, thermal power plant and road repair).

Rural-focussed Schemes

The PMAY or housing scheme was launched in June 2015 to make housing affordable for Indians. In the urban areas, the scheme is executed under the Ministry of Housing and Urban Affairs, while in the rural areas, it is executed by the Ministry of Rural Development. Under the rural housing scheme, construction of 29.5 million houses has been sanctioned since 2016 and out of those, 26.1 million have been built. Under this scheme, financial assistance of Rs1.2 lakh is provided to the beneficiary for construction of houses in the plains, while Rs1.3 lakh is provided in the hilly areas.
 
The prime minister recently announced the construction of an additional 30 million houses under the housing scheme which includes 20 million houses in rural areas and 10 million in urban areas.
 
The PM Kisan Samman Nidhi is a farmer loan assistance programme, a central sector scheme launched in February 2019, to provide financial assistance worth Rs6,000 to small and marginal farmers. The amount is transferred in three equal instalments, every four months. It is directly credited into the bank accounts of the beneficiaries without the involvement of middlemen.