Budgeting Beyond Election: Focus Should Remain on Modinomics


The interim budget to be presented on February 1 will likely set the direction and give a clear message about the Narendra Modi government’s pro-poor policies with fiscal prudence to make India a developed nation.

However, the government is under no pressure at this juncture to announce any big-bang sops. More so, after the ruling party / coalition’s resounding victory in three states in December namely, Rajasthan, Madhya Pradesh and Chhattisgarh.

In this backdrop, Finance Minister Nirmala Sitharaman will present her sixth Budget which could largely improve upon ongoing schemes by tweaking them to add more beneficiaries or increasing the benefit for a certain class of people.

The last interim budget presented on February 1, 2019, included significant policy announcements for farmers and the middle class.

Ahead of the Parliamentary election due in April-May, the Prime Minister has pledged to work for “four castes” or target groups: Farmers, Poor, Women and Youth.

So, the government may enhance the financial assistance by 85 per cent for PM Awas Yojana-Gramin beneficiaries from Rs 1.3 lakh per unit to Rs 2.4 lakh.

With the PM Awas Yojana-Urban scheme ending in March this year, the Centre may unveil a new Rs. 60,000 crore housing interest subsidy scheme for the urban poor and middle class for five years.

Among others, it might earmark around Rs. 90,000 crore for the flagship Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) in the budget estimate (BE) for 2024-25, an increase of 50 per cent over 2023-24 BE, in a strong signal to the poor ahead of general elections.

It could also give guidance on tweaking the National Pension System to increase pensionary benefits for the government staff to ensure that the benefits of pension reforms are drowned in electoral populism by reverting to the fiscally disastrous old pension system (OPS). In OPS, neither the government nor the employees contribute and pension is paid out of the government revenues when they occur, depriving funds for development activities.

While there are no rules that bar announcing sops in an interim budget, whose main objective is to take care of the government expenditure till a new government takes charge, the government should stay the course on Modinomics.

After coming to power in May 2014, the Modi government has championed reforms, the biggest being the implementation of Goods and Services Tax (GST). Similarly, Mr. Modi has improved upon and given a new life to many of the pro-poor schemes of the previous dispensation by using technology to better target beneficiaries and plug leakages.

In the last nine years of the Modi government, an estimated 248.2 million people moved out of multidimensional poverty between 2013-14 and 2022-23. With this, India has achieved a key Sustainable Development Goal (SDG) halving poverty, seven years ahead of the United Nation’s target of 2030, according to a discussion paper by top government think-tank NITI Aayog.

India has made remarkable progress in improving the lives of people, aiming to reduce poverty in all dimensions. Noteworthy initiatives like Poshan Abhiyan and Anemia Mukt Bharat have significantly enhanced access to healthcare facilities, leading to a substantial decrease in deprivation. Various programs addressing maternal health, clean cooking fuel distribution through Ujjwala Yojana, improved electricity coverage and transformative campaigns like Swachh Bharat Mission and Jal Jeevan Mission have collectively elevated living conditions and overall well-being of people. Additionally, flagship programs like Pradhan Mantri Jan Arogya Yojana have played pivotal roles in reducing out of pocket expenditure which pushed millions into poverty earlier.

The country’s poor have saved around Rs. 1 trillion by availing of the Centre’s Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana (PM-JAY) which offers Rs. 5-lakh-a-year free health insurance coverage and affordable medicines at Jan Aushadhi Kendra’s. The PM-JAY scheme should be extended going forward to middle-class families to protect them from health-related expenditure shocks.

The government should use the opportunity to further schemes meant for education, healthcare and skill development activities for the youth that directly increase the ability of people to move out of poverty.

These public goods have huge multiplier benefits for human capital and economic growth.

Even though India has become the most populous country for the first time in recorded history by overtaking China, it has to fix structural issues including accelerating investment in health education and undertaking land-labour reforms to boost economic growth and create more jobs before demographic dividend peters out.

During a demographic transition – where fertility rates decline, life expectancy rises and workforces grow – human capital investment could trigger a demographic dividend, not only through greater economic productivity but also from more health, education and empowerment. 

While India has a new education policy (NEP 2020) and the government (the Centre and states together) want to invest 6 per cent of the GDP, the actual investment is 2.9 per cent of the GDP. The investments in education need to be ramped up as this is the ladder of opportunity for the poor.

In 2023-24, the estimated expenditure of the Ministry of Education was Rs 1,12,899 crore. Of this, the Department of School Education and Literacy has been allocated 61 per cent and the Department of Higher Education has been allocated the remaining 39 per cent. 

In health, public investment is just around 1 per cent of GDP. The 15th Finance Commission had recommended that India’s public expenditure on health should increase to 2.5 per cent of GDP by 2025. In 2023-24, the expenditure of the Ministry of Health and Family Welfare was estimated to be Rs 89,155 crore, a 13 per cent increase from revised estimates for 2022-23.

Even though health is on the state list and education is on the concurrent list (Centre and states) under the Constitution, the resources available to states are limited. Hence, the Centre should launch reform-linked assistance to states in both these two critical areas of national importance.

As far as investors are concerned, they will look at a few key things in the interim budget: the government’s commitment to the medium-term fiscal consolidation path and whether capex growth can continue with fiscal consolidation.

The government should try to consolidate the fiscal deficit to 5.2-5.4 per cent of GDP in 2024-25 given their medium-term fiscal consolidation target of reaching 4.5 per cent of GDP by 2025-26. The focus on capital expenditure should continue, but at a slower pace given the fiscal constraint

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