Union Budget 2024: A Three-Pronged Approach to Address Inflation, Debt, and Jobs

Finance Minister Nirmala Sitharaman.

(Photo: PTI)

The Modi government, in its third elected term, will present a full Union Budget later this month.

It would not be entirely incorrect to assume that in certain areas, the government may continue embarking on a few of its previous fiscal strategies, as indicated by earlier political economy interventions.

For example, it is expected that the current government will continue its higher capex-fuelled spending strategy, despite its failure to substantially boost private investment levels over the last few years. This was executed at the cost of revenue expenditure needs (see the decline observed in year-on-year government spending on critical social welfare programs).

The focus for this Budget must be trilateral. Keep the noise low and the fiscal math simple on deficit and borrowing considerations. Align the core fiscal policy compass towards addressing higher (food) inflation woes on one focal axis, while directing the other towards creating better employment opportunities.

Let’s look at these one at a time.

Inflation

Inflation may be a key theme in this Budget given how high food-price inflation has continually remained a thorn in the flesh of the Modi government, which could have contributed to the BJP losing its critical vote share amongst low- to middle-income groups—especially in key states like UP and Rajasthan.

Food inflation is the primary driver of inflation in India. India's Consumer Price Index (CPI) in May 2024 rose to 4.75 percent, as opposed to 4.31 percent in May 2023. Meanwhile, the Consumer Food Price Index (CFPI) for May 2024 was 8.69 percent, a steep rise from May 2023’s 2.96 percent. Increasing vegetable prices such as those of tomatoes, onions, and potatoes were caused by extreme weather conditions including heatwaves and floods.

India's CPI and food inflation.

Source: Author’s Calculations from Trading Economics Database 

In the core constituent weights of the CPI, food and beverages account for 45.86 percent of the overall weight (including prices of vegetables, cereals, pulses, and milk), miscellaneous holds 28.31 percent (including services like education, healthcare, and travel), while housing occupies 10.07 percent (including costs of housing, rent, maintenance, and utilities).

The government’s fiscal agenda, at least in the long run, needs to address these three weights. The temporality and seasonality of price rises, surfacing from the food and beverages component, warrants more direct cyclical interventions by the government, which it has failed to do thus far.

Debt

Recurring ad-hoc bans and restrictions on import-export good movements have created a negative business sentiment amongst agri-traders. Buffer stocks have been used for rationing schemes while the management of the MSP (minimum support price) system for a diversified food basket has been a disaster, often making MSP-dependent farm groups unhappy.

There is a need for the government to change that perception this year. There will be a big spending challenge, given that the Modi government now has to pay a ‘coalition tax’. NDA allies from Bihar and Andhra Pradesh have already stated their spending demands and special status needs from the Union government.

According to reports, “The combined fiscal demands from the two coalition parties (JDU in Bihar and TDP in Andhra) are equivalent to more than half of the government’s annual food subsidy budget of 2.2 trillion rupees. That shows the fiscal pressure Modi is under as he balances the demands of his allies with his goals of curbing government debt.”

Both the BJP’s main allies want the federal government to allow them to borrow more in the states they govern. Fiscal rules, as per reports, stipulate that states limit their borrowing to three percent of the region’s gross domestic product. Bihar has asked for an additional one percent of headroom with no strings attached, while Andhra Pradesh has requested 0.5 percent.

India's government debt to GDP and government spending to GDP.

Source: Author’s Calculations from Trading Economics Database 

This might affect the Modi government’s spending capabilities in an already fiscally tight and debt-expanding government position (refer to the figure above to see how the government’s debt has expanded along with its spending).

Hence, the vital macro-observatory point here would be to closely monitor the government’s debt and borrowing levels, which, as this author has previously argued, are already teetering at dangerous levels. Household debt and Corporate debt too have been on the rise, while investments and savings remain low. These core Keynesian challenges are waiting to be addressed in the upcoming Budget.

India's employment rate and labour force participation rate.

Source: Author’s Calculations from Trading Economics Database 

Jobs

The third key issue is to more narrowly focus and design a medium- to long-term approach for creating ‘good’ jobs in the economy while ensuring job-based social security (explained here). The Modi government has ignored the nation’s macro employment fault lines for far too long. This apathy made a significant chunk of the youth-voter base (in states with high unemployment like Haryana and UP) vote against the BJP.

Creating vital, well-organised labour-intensive jobs and incentivising growth in existing job-rich sectors demands a strategic overhaul in industrial policy thinking. However, the current government’s macro-policy advisory framework cannot effectively advise on such pivotal shifts, limiting its influence on policy outcomes.

The big Make in India and manufacturing-led growth push hasn’t created the foretold employment growth story. What we see instead is a government that is fiscally strained—not allocating sufficient funds in critical job-security areas for the rural population via MGNREGA, or an urban-focused version of NREGA, the demand for which has been stated in the past.

The way Modi 3.0 handles these three issues in the upcoming Budget and its overall macro-economic policy strategy, may very well define its third term and the economy’s medium to long-term outlook, whose macro-picture, at the moment, looks more bleak than promising on these fronts.

(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)