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'The finance minister has done as much as she can when you look into the fiscal constraints she had.'
It is interesting to note that independent economists look at the government's Budget in one way, and the economists who work in industry view it in a different light.
This is what Gaura Sen Gupta, Chief Economist, IDFC First Bank, has to say about the 2025 Budget.
"Where the Budget scores is in fiscal consolidation by reducing revenue expenditure," Sen Gupta tells Rediff.com's Shobha Warrier.
Everybody is only talking about the Rs 12 lakh tax-free limit set by the finance minister in the Budget. Will this make a difference in the economy? Will the middle class start spending more and create an impact in the economy?
Definitely. It will help those who are in the income tax bracket.
It is a very small percentage of the population...
That is true. Yes, only 2% of the population have paid income tax. I am not talking about those who have filed the returns.
For those who pay tax, it is a generous cut, given the fiscal constraints.
So, do you expect the middle class to consume more now?
It alone can't boost consumption because the ability to spend will depend on the individuals outlook on income and the job market.
You will spend if job creation is strong, and also if the income growth is strong.
The finance minister has done as much as she can when you look into the fiscal constraints she had.
Are you happy with the way the finance minister tackled some of the issues the economy faces now, like unemployment, FDI going away, inflation, no private investment...?
As far as inflation is concerned, it is led by the supply side, and basically food inflation. It is tackled through supply-side measures by the government of India.
We had a bad run of inflation in the last few years because of the successive shocks on the supply side. But the future trajectory is on the moderation side with sharp reduction in food prices in January, especially vegetables.
The good part of the Budget is that it is not an inflationary Budget as the revenue expenditure as a proportion to the GDP has come down by 0.4%.
So, the Budget is good from the inflation perspective.
Yes, the FDI numbers on a net basis is not good at all. In April-November, we have got a net FDI of only $0.5 billion.
It is not that we are not attracting FDI; we are. Gross FDI inflows are actually higher by 20.8%YoY.
The slowdown in net FDI inflows is because we are losing a large part to repatriation as right now as US yields have increased.
Plus, outward investment has gone up because Indian firms are investing in their subsidiaries abroad.
In this Budget, the FDI factor is handled by having 100% FDI in insurance.
But the sentiment will change once there is a reduction in US yields. Then, the pressure to take money out of India will come down.
The fact is, a lot of it is not in our hands. This slowdown in capital inflows is being faced by other EMs.
The private sector has not been showing any confidence in the economy and not investing despite the government putting in capital expenditure every year. Do you see private investment happening now?
The Budget works with many constraints like, for example, we cannot give up on fiscal consolidation as we are an emerging market. That automatically puts a constraint on how much resources you have.
In this Budget, they have given a boost to the consumption side. Despite that, they were able to maintain the capital expenditure target at 3.1% of the GDP.
In terms of growth rate, capital expenditure is up by 10% compared to 7% last in FY25.
There is a limitation on how much capex the government can execute in a year.
As far as the private companies are concerned -- the non-financial listed companies -- there is a decline in their profit growth.
The decline in profits is led by decline in sales growth. It shows there is a demand constraint.
As a company, if you don't see domestic demand improving or even external demand going up, fresh addition to capacities will not happen.
The good thing is that the company balance sheets are in a better shape now and as are bank balance sheets.
We have been seeing their lack of confidence in the market for many years now...
We also see that overall consumption has not picked up.
GDP growth has been led by capex more than consumption.
2007.
During that period, a couple of things happened. Global growth was very strong with China growing at 10%.
Demographics were more positive with a much younger economy. And the profits growth of companies was high.
During that period there was a consistent growth in consumption about 6.5%.
There was also a very strong growth of exports.
Under such circumstances, we saw private capex also picking up strongly.
But now, what the government can do is, they can continue spending on capex and look into the implementation of the projects.
The Budget also talks about ease of doing business and enhancement of credit guarantee schemes for the MSMEs.
Do you expect it to help the MSME sector? The sector that employs the largest number of people, has not been performing well at all...
The Budget talks about ensuring that the credit flow to the sector continues.
And the data shows bank credit to the sector is growing.
But the sector feels there is nothing in the Budget for the revival...
The government does not have unlimited resources. This time, they have given a push to increase consumption demand.
The focus of the Budget was on consumption this time.
Still, the government has seen to it that the credit guarantee scheme continues.
The MSME sector is affected as majority of them rely on exports. When the global demand is down, it will get tough for the MSME sector.
So, a combination of domestic and global factors plays here.
It was the 8th consecutive Budget by the finance minister. What we have for the last many years is increased unemployment, inequality, the MSME sector struggling, growth down.. Missed opportunities?
I disagree. Actually, there were a lot of challenges in front of the government.
We had to deal with a pandemic.
The employment scene depends a lot on how the private sector reacts.
So, it had to deal with a number of events.
Will this Budget be able to accelerate growth?
From the growth perspective, it is a neutral Budget.
That's because revenue expenditure in proportion to the GDP is down.
Where the Budget scores is in fiscal consolidation by reducing revenue expenditure.
The good part about the Budget is, it is fiscally prudent and has maintained capital expenditure as % of GDP at 3.1%.
Feature Presentation: Rajesh Alva/Rediff.com