FM Sitharaman's budget focus: Push for manufacturing jobs, expanding PLI schemes

“As the government will now have to take allies on board for major decisions, there will be some differences from the previous terms. However, we do not expect deviation from the stated fiscal deficit target for FY25,” says Anubhuti Sahay, head, South Asia Economics Research (India), at Standard Chartered Bank. Fiscal prudence, creation of jobs and managing inflation have been among the issues that the government has discussed with the economists in a series of pre-budget consultations.

A major comforting factor for the government will be the RBI’s record dividend transfer of Rs 2.11 lakh crore to the central government, approved by its board in May. Sahay says the record dividend transfer—emerging as surplus revenues of 0.2-0.3 percent of GDP—“is likely to offset any higher government spending on, say, rural areas, (such as farmer income schemes) or financial assistances to the states of alliance parties.”

Sitharaman hopes to retain the fiscal deficit target for FY25 at 5.1 percent of GDP, as announced in February’s interim budget.

Report card: Scoring well

Voters, the media and psephologists have debated on how the Modi-led government fared during the previous two terms and what led to the weaker-than-expected party performance. But economists we spoke to suggest the government and Sitharaman have fared well in both managing the fiscal deficit and widening the tax net and collections at large. These areas are going to continue to be in focus, with the Goods and Services Tax (GST) Council aiming to continue with tax reforms, which could include waiver of interest or penalties on tax notices between 2017 and 2020 and a monetary limit to pursue disputes at the GST Appellate Tribunal.

There is clearly unfinished agenda in the form of boosting employment, providing more incentives to production-linked incentives (PLI) schemes and taking a decision on whether it needs to sell its stake in profitable government-owned undertakings, to ensure divestment and privatisation.

“There has been a massive clean-up in terms of financial health of banks and tax collection efficiency,” an investment banker told Forbes India on condition of anonymity. The collections from the GST, which for months ranged between Rs 70,000-80,000 crore, has now crossed the Rs 2 lakh crore mark in April.

“The finance minister has done a commendable job both in consolidating the fiscal deficit and ensuring a better quality of fiscal consolidation. The expenditure mix is better with rising share of capex versus revenue expenditure, and subsidies are better targeted. The rising tax to GDP ratio, driven by better compliance, better integration of GST is also notable,” she said.

May showed economic activity slowing, with the Jefferies Economic Indicator for May down by -0,55 percentage points month-on-month, at 5.2 percent year-on-year. The markets turned volatile in early June when the results were divergent from the exit polls, but have recovered since with the BJP emerging victorious, with alliance support. The BSE Sensex has recovered 7.5 percent from a low of 72,079 levels on June 3 to touch a record close of 77,478 points on June 20.

Also read: Joblessness and rising food prices: Real challenges for BJP and its allies

Capex, manufacturing push, PLI incentives

Nomura’s economists Sonal Varma and Aurodeep Nandi say the recent election outcome “could result in some reorientation of spending towards revex (revenue expenditure) from capex”, in a note to clients on June 5. But they do not foresee “a dismissal of macro prudence”. “We do not expect any slip of the interim budget target of 5.1 percent of GDP, but if the government deems reflationary policies as a political necessity, then that could mean slower consolidation,” they said.

Sakshi Gupta, principal economist with HDFC Bank also agrees that Sitharaman will “continue with the roadmap they have for fiscal consolidation”. Earlier, after the RBI dividend was announced, economists thought the government could have some space to be more aggressive [towards fiscal consolidation]. But having indicated that they would like to retain the fiscal deficit estimate at 5.1 percent of GDP and use the fiscal elbow room they have—due to RBI dividend—they could allocate resources to certain welfare schemes.

This means the outlay towards housing, water, sanitation and healthcare is likely to be increased. It is most likely that the government “could use resources to divert funds towards the PM-KISAN or also the MGNREGA schemes. The government could continue their focus towards addressing some of the structural issues and announcing reforms which are more pro-cyclical in nature,” Gupta told Forbes India.

Rajasthan’s apex industry body, the PHD Chamber of Commerce and Industry, interacted with Sitharaman in a pre-budget discussion on June 20, and identified some key reforms which needed to be introduced.

These include enhancing the manufacturing share in GDP to 25 percent by 2030, expanding the PLI scheme beyond the 14 sectors with the addition of more labour-intensive sectors, change in classification norms of MSMEs for non-performing assets (NPAs) from the 90 days limit to 180 days, and rationalisation of direct taxes for the middle class.

“A host of actions and measures will be required to increase the share of manufacturing to GDP to employ a younger population. India needs to add 10-12 million jobs a year,” Stanchart’s Sahay says. “The success of the PLI scheme in say mobile phone is encouraging. However, it needs to be streamlined for other sectors to attract more investment. Non fiscal measures like easing the process of doing business in India will be important to boost manufacturing further.”

The murmur from industry bodies to expand the scope and base of PLI schemes is getting louder. So far, incentives worth Rs 6,800 crore were disbursed among eligible beneficiaries of PLI schemes in FY24, according to official data from the Department for Promotion of Industry and Internal Trade (DPIIT).

The government will need to spend more towards vocational training and skilling to make youth employable. “Only 4-5 percent of our labour force has formal vocational training, versus 50-70 percent for other countries,” Sahay says.

Despite promises and efforts such as ‘Make in India’ and several PLI schemes, data shows that the manufacturing sector’s share in India’s GDP has been rangebound between 13-17 percent for years, Ruling governments have been unable to improve on the situation, which Dr Himanshu, an associate professor at Jawaharlal Nehru University, says suggests a “gradual de-industrialisation of India’s economy, which will have implications not just for output growth, but also employment and income growth”.

“The trend of gradual de-industrialisation is confirmation of a reversal in the process of our economy’s structural transformation, as indicated by other data, notably the Periodic Labour Force Survey (PLFS),” Himanshu, wrote in his column in June 2023, for Mint newspaper.

The bugbears

Even as most economists expect policy continuity in the third term, there are some concerns which need to be resolved. Sahay says there needs to be clarity on “the size and timeline of any disbursement of financial assistance package to the states of allies' parties”. Also, the direction as to how the government plans to reach the fiscal deficit target of 3-3.5 percent of GDP in the medium term without compromising on capex needs to be understood.

For long, several governments have failed to complete their set of agriculture, land and labour reforms during each term. Economists say agri output over last 2-3 cropping cycle has weighed on demand. Around 65 percent of India's population is rural; 45 percent of the labour force is dependent on agriculture and approximately 37 percent of income for a rural agricultural household is generated by sale of agricultural produce, Sahay says. “Unless we drive agri reform and get export competitiveness up, job creation in manufacturing sector is not going to be possible,” she adds.

How much does Sitharaman choose to discuss divestment/ privatisation and asset monetisation of PSUs is anybody’s guess. But experts believe that as long as the fiscal deficit is being reigned in and government spending is not being sacrificed, this part of the piece could well not be a priority for the government, for the near term.

The government has done much of the hard work in the second term. Now Sitharaman will continue on the path to gradual fiscal consolidation, while managing to push for manufacturing jobs and widening the tax net.