Money In People’s Hands, And More

Finance Minister Nirmala Sitharaman’s eighth Budget speech, her shortest to date (just one hour and 14 minutes), ticked most boxes. She presented a fiscally prudent Budget with consumption at the centre stage, to be driven by the middle class.

As expected, the Revised Estimate of the fiscal deficit for the current financial year was pegged at 4.8 per cent of the gross domestic product (GDP). For the next year (FY26), it is estimated at 4.4 per cent of the GDP, in sync with the fiscal consolidation goal.

From FY27 onwards, the fiscal consolidation path takes a new turn. The primary focus will be on the debt-to-GDP ratio, and the fiscal deficit target will be derived from that. This ratio is estimated to decline from 57.1 per cent in FY25 to 56.1 in FY26, and to about 50 per cent (plus/minus 1 percentage point) by March 31, 2031. The new path was laid down by the Fiscal Responsibility and Budget Management Act. The government is finally committing to follow that. Of course, the goal post has been shifted.

To finance the fiscal deficit, the net market borrowing through dated securities is pegged at Rs 11.54 trillion and the gross borrowing at Rs 14.82 trillion. The gross borrowing programme is marginally higher than what bond dealers were expecting, but it won't impact bond yields as the Reserve Bank of India has been active in buying bonds to infuse liquidity.

In the current financial year, the net market borrowing has been to the tune of Rs 11.63 trillion and the gross borrowing stands at Rs 14.01 trillion. Of this, Rs 12.84 trillion has already been mobilised, leaving a balance of Rs 1.27 trillion to be raised in February and March.

Incidentally, FY24 had seen the highest-ever gross market borrowing by the Centre – Rs 15.43 trillion (net Rs 12.29 trillion), more than double of FY20, the year before the Covid-19 pandemic ravaged the world.

The middle class, about 31 per cent of India’s population, is rejoicing the cut in income tax, which will make the central exchequer poorer by Rs 1 trillion. (Only those taxpayers who have opted for the new tax regime will enjoy the benefits.) Despite that, the Budget has not wavered from the fiscal consolidation path. How has this been done? By rationalising on the expenditure front. Also, tax cut notwithstanding, the overall estimate for tax collection is quite?impressive. In the scheme of things, the capital gains tax probably remains?one of the key drivers.

Let’s take a close look at the measures for the financial sector. Ten years after raising the foreign direct investment (FDI) limit for the insurance sector from 26 per cent to 74 per cent, this Budget has upped it to 100 per cent, although with a rider – foreign firms will have to invest the entire premium income in India. The current norms for insurance FDI will?also?be reviewed and simplified.

India Post and its payments bank will be repositioned to act as a catalyst for the rural economy. The plan to turn it into a large public logistic organisation is fine since there are 150,000 rural post offices and a network of 240,000?dak sevaks.?However, expecting it to meet the rising needs of new entrepreneurs, women, self-help groups (SHGs), MSMEs and large business organisations seems to be too much if one looks at the performance of India Post Payments Bank.

Public sector banks, too, need to play a role in the “transformative reforms” that the Budget has promised. They will develop the ‘Grameen Credit Score’ framework to serve the credit needs of SHG members and people in rural areas.

The loan limit for the Kisan Credit Cards (KCC) has been increased. Such credit cards facilitate short-term loans for 77 million farmers, fishermen, and dairy farmers. The loan limit under the Modified Interest Subvention Scheme is being raised from Rs 3 lakh to Rs 5 lakh. The bankers know well how the KCC loan, introduced in 1998, works.

The Budget also plans to introduce customised credit cards with a Rs 5 lakh limit for micro enterprises registered on the Udyam portal. In the first year, 1 million such cards will be issued. Who will issue them??The Budget doesn't mention it but the public sector banks for sure.

A new body is being set up under the Financial Stability and Development Council (FSDC) to evaluate the impact of prevailing financial regulations. It will formulate a framework to hasten the response time of the regulators to evolving situations and the overall development of the financial sector. The finance minister chairs the FSDC.

Finally, the Budget is silent on the privatisation of public sector banks, and the target for divestment continues to be modest. There’s no surprise on this front.

This column first appeared in Business Standard.

Writes Banker's Trust every Monday in Business Standard.

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