The finance minister, in her Budget speech, should focus more on what she is directly responsible for, rather than on programmes where her role is largely supportive, notes Nitin Desai.
In a few hours, the finance minister will present the 2025-2026 Budget.
Judging by past trends, much of her speech will elaborate on development programmes and schemes to be implemented by other ministries.
The finance minister's Budget speech last year consisted of 165 paragraphs, with the first part -- mostly focused on expenditure proposals--accounting for roughly 70 per cent of the speech.
The elaboration of expenditure proposals focused primarily on programmes, which must have been developed by other government departments responsible for their implementation.
The finance minister should indicate the expenditure pattern in the Budget more from the perspective of public finance management to ensure macroeconomic stability, rather than focusing primarily on the financing of sectoral programmes.
However, publicising the broad range of development efforts by all government departments has been a characteristic feature of most Budget speeches in recent years.
This needs to change and a larger portion of the Budget speech should be about actions assessed and decided in the finance ministry, which will be mainly about Budget management, particularly how the necessary budgetary resources will be raised and the impact this will have on growth and development.
It must also include the strategy for managing and developing the financial intermediation system that connects buyers and sellers and savers and investors.
It must, of course, include the outcome of major announcements in the previous year's Budget.
The finance ministry's most crucial impact is on the immediate short-term and medium-term prospects for the economy.
At present, the most important growth policy challenge we face is the slowdown in both the growth and long-term potential of the manufacturing sector.
While fixed investment has rebounded following the setbacks during the Covid years -- it reached 31.3 per cent of GDP at current prices in the second advance estimate for 2023-2024 -- it is still less than the peak figure of 34.3 per cent in 2011-2012.
The National Accounts also reveal that the share of fixed investment in manufacturing and mining as a percentage of GDP has fallen from 6.4 per cent at the start of liberalisation in 1990-1991 to 5.3 per cent in 2022-2023, and that the share of manufacturing in gross value added (GVA) has declined from 21 per cent in 1990-1991 to 16 per cent in 2022-2023.
The big increase is in the services sector, where fixed investment as a proportion of GDP went up substantially from 4.5 per cent in 1990-1991 to 9.2 per cent in 2022-2023.
This shift may reflect that a significant part of the post-liberalisation growth is attributable to the higher development of service enterprises, particularly the export-oriented IT companies and the growing investment in the rapid development of e-commerce and e-finance.
Another crucial factor in Budget formulation is the shift in emphasis from the public sector to the private corporate sector following the 1991 liberalisation.
However, this shift in investment did not enhance the financing capabilities of the corporate sector sufficiently enough to make it comparable to the public sector's pre-liberalisation capacity to mobilise investment resources through the fiscal system.
There is also the shift of budgetary resources away from fixed investment to subsidies and freebie handouts.
This is reflected in the substantial decline in the central government's assets as a proportion of its liabilities.
This rose from 67 per cent in 1950-1951 to 100 per cent by the early 1960s and stayed at that level till the early 1980s because of the emphasis on investment in public sector industrial and infrastructure corporations.
Since then, it has declined steadily to 75 per cent in 1990-1991 and 42 per cent in 2023-2024, with the shift towards subsidies and handouts.
The growing role of freebies in electoral contests may well reduce the ratio of government assets to liabilities even further.
In the past, the government sought to stimulate manufacturing by reducing the corporate tax rate from 30 per cent to 22 per cent in 2019. But it did not have a stimulating effect on corporate investment.
The finance ministry must recognise that what drives corporate investment is demand growth and potential competition, both of which can be stimulated through several policy areas under its control.
The primary focus of the Budget speech this year must be on these items -- what its policies will do to stimulate demand growth and what impact they will have on national and global competition.
A broader issue about the impact of the tax structure on income distribution has seldom received much attention in recent years, with the focus primarily on its impact on demand growth.
The direct impact of the finance ministry on domestic demand growth will depend on its rates of personal taxation, which are reasonable at present and should be restructured mainly for inflation adjustment.
Changes like the ones made recently about alternative rates without major concessions seem to be effective.
Personal income tax changes will affect the spending capacity mainly of the salaried middle class and small entrepreneurs.
However, the demand growth we need comes from lower income groups who are outside the tax net.
This will be affected mainly by how Budget programmes and policies stimulate small enterprise growth, which, in India, is a major source of non-agricultural employment growth.
More effective small enterprise development may also help in creating national value chains, connecting the higher manufacturing growth states with the more backward northern states in need of higher non-agricultural employment generation.
The finance minister did announce several micro, small and medium enterprises (MSME) support moves in the financial sector in last year's Budget.
She should provide an indication of how much has been achieved in this regard over the past year, particularly in the northern states.
This is also the one area within the finance ministry's direct responsibilities that has a significant impact on poverty and inequality reduction.
When it comes to stimulating ambition in the corporate sector, the key lies in strengthening the incentives for product and process development.
The most effective instrument for this is opening the Indian economy to global competition through reduced tariff protection and a liberal foreign direct investment policy.
This can work and one can see this in the way Indian entrepreneurs are competing effectively with foreign companies in e-commerce.
Last year's Budget also included a major programme to promote research and development in the private sector.
This is crucial, and the finance minister must provide an indication of how this has been implemented over the year.
A major related task for the finance ministry is the promotion of financial intermediation, which is crucial for private sector-oriented growth strategy.
In recent years, there have been several positive developments, including the emergence of non-banking finance companies, internet-based financial intermediation, and the rapid rise of UPI, which opens marketing opportunities for MSMEs.
One area that requires action is the promotion of domestic venture capital financing as startups are crucial for the employment growth we want.
The finance minister should devote a significant part of her speech to outlining a broad strategy for the development of financial intermediation.
Broadly speaking, the finance minister, in her Budget speech, should focus more on what she is directly responsible for, rather than on programmes where her role is largely supportive.
Feature Presentation: Ashish Narsale/Rediff.com
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