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Welcome to EY India Insights podcast series. I am Pallavi, your host for today's episode. Tune into our series on Interim Budget 2024, where we share insights on the macroeconomic landscape and the direct impact on individuals, taxpayers and businesses. Joining us is Rajnish Gupta, EY India Partner, Tax and Economic Policy Group. He has over 30 years of experience in shaping public policy across diverse industries like energy, natural resources, telecom, IT, automobiles, education, and more.

Thank you, Rajnish, for joining us and welcome to the podcast.

Rajnish Gupta: Thank you for inviting me and a pleasure to be here.

Pallavi: A simple question to start off with. What are the highlights of the Interim Budget for you?

Rajnish: This budget is in line with government's stated goal of focusing on economic growth, which is the No.1 agenda for our country. So, the budget says that we have a target for the economy to grow to US$7 trillion by 2030 and to make it the developed country by 2047. One of the pillars of this growth, which the RBI and the government both have emphasized, is to ensure that there is macroeconomic and fiscal stability. So, this budget focuses on maintaining economic growth with lower inflation, for example, for the coming year.

For example, for the coming year, a 10.5% nominal growth rate has been assumed to make projections. So, if we were to assume a 7% real growth rate, then we are looking at a GDP deflator of 3.5%, which are both very welcome assumptions. They are also looking at continuing the process of reducing the fiscal deficit, which is projected at 5.1% for the coming year in 2024-25. This is really good because it safeguards India from future economic shocks. It will also ensure that the inflation stays low and that more savings are available for private investment and that the government does not take the bulk of the savings away.

The revenue and the expenditure estimates are based on the trends we have seen in the past few budgets. They have not been aggressive in their revenue estimates. The tax buoyancy, for example, is projected at 1.09 for 2024-25 against the achievement of 1.4 for the year gone by. These are quite conservative.

There continues to be a focus on spending on infrastructure, which has been one of the major drivers of growth for the Indian economy, along with private investments, which are flowing into the real estate sector.

The instruments of growth have been maintained. They have also avoided large-scale spending on freebies, especially given that this is an election year. And lastly, by not tinkering with the taxes and in the way the government spends its money, the budget signals stability, it signals predictability, and it signals continuity. That I would say, are the main takeaways I have from the budget.

 

Pallavi: Thank you, Rajnish, for highlighting the budget highlights. Shifting gears toward the manufacturing sector, the government has been pursuing manufacturing in India for the country to be atmanirbhar. How does this budget build upon this policy objective?

Rajnish: One of the things that stood out is the government’s continued focus on manufacturing and becoming atmanirbhar. The government recognizes that the era of hyperglobalization and global manufacturing is over. They also recognize that the integration of global supply chains, which have taken place over the last few decades, is there to stay. Any alternatives will take time to emerge. However, given all that, this does not deter the government from pursuing opportunities like Friendshoring.

Then there is the focus on transportation and logistics cost; bringing them down to a level that makes the final prices of products competitive. In this budget, all the money that the government is spending on rail and roads is, in a way, going toward that objective. There was a very significant announcement when the government said that they would invest in dedicated freight corridors, routes with movement of mineral produce and for port connectivity projects. All these are to do with freight transportation and once implemented, they will lower the logistics costs and make manufacturing more competitive.

The Finance Minister also spoke about the India-Middle East-Europe corridor, which again is related to the movement of goods and will drive manufacturing in India.

The FM talked about the bilateral investment agreements, and she did not talk about FTAs (Free Trade Agreements), which signals that the focus is on investing in India.

There was one disappointment that the sunset clause for the concessional 15% tax rate on the new manufacturing units was not extended. The other announcements included Oil Seeds Mission and becoming atmanirbhar in defense manufacturing. Both these are huge import items for India.

So, if you put all these announcements together, I would say that the thrust on manufacturing continues, even though the shift in supply chains is not happening as fast as was anticipated a few years ago.

Pallavi: Thank you, Rajnish, for those inputs. We see that climate change and energy transition are both big issues globally. What is the government thinking and how do the budget announcements align with this?

Rajnish: In the budget speech, the theme emphasized the importance of energy security for India. We know that many of the past economic crises, like in 1991, were triggered by high oil prices, and India imports energy in a significant way. So, the government thinking is quite clear that energy transition and energy security, meaning a reduction of imports, go hand-in-hand and energy transition in a way or a tool to increase India's energy independence.

She also emphasized that the commitment to becoming net zero by 2070 stays. While the government is committed to all this, what they really have to balance is the pace at which decarbonization happens. They do not want to push decarbonization too fast, else it could start impacting economic growth. So, for example, power demand has grown at 9% over the last two years and we have had to use coal-based power to meet that demand.

There is pressure from advanced economies and institutions to reduce the usage of fossil fuels. There are new instruments like the Carbon Border Adjustment Mechanism (CBAM), which forces the timeline. That is the type of constraint that the government is working with in terms of the pressure globally and its own commitments and its own needs.

All these announcements, for example on rooftop solar, promoting biofuels or investments in coal gasification and liquefaction capacity, point toward India becoming a greener economy and becoming green by using domestic resources and reducing energy import. The other thing in energy transition is that this is supposed to be achieved through implementation of a lot of new technologies like carbon capture and utilization or green hydrogen or offshore wind.

These (technologies) are being developed globally through huge subsidies being given by those governments. We do not have the fiscal space to give similar incentives in India. However, the government, by announcing that there would be viability gap funding for 1 GW of offshore wind, is basically signaling that we will try to be in the game and push these technologies to the extent that the fiscal space in India allows.

Lastly, I suspect, though this has not been explicitly stated in the budget, that there may be changes in the FAME scheme (Faster Adoption and Manufacturing of (Hybrid and) Electric vehicles). One, the allocation is lowered by nearly INR2,000 crore and the focus will move toward charging infrastructure and e-buses rather than subsidies for individual consumers.

Pallavi: Is there any particular statement in the Interim Budget 2024 related to the (government’s) future intention that caught your attention?

Rajnish: There were two comments that the FM made in the budget speech which are very interesting. One, she mentioned that they want the next generation of reforms, and which would need consensus to be built up with states. What the government did not say was what specific areas they have in mind. This is something of great interest because there are things like urbanization or public sector reforms which are related to state governments or the way the state governments interact with investors. There are several issues and this is something of great interest and we should watch out for it in the future.

The second thing was that the Finance Minister mentioned that there would be a committee to set up to address the challenges related to population growth and demographic changes. One of the things that we have been emphasizing when we say India has a great future is the demographic dividend that we have. This would be something of keen interest to know what are the terms of reference that the government has in mind for such a committee, what are the concerns and what is the government thinking in this area. I would say this is something to watch out for in the coming months.

Pallavi:  Thank you, Rajnish, for joining us today and sharing such valuable inputs. Our listeners shall have a greater understanding of the budget highlights and also the impact on manufacturing and climate change.

Rajnish: It was a pleasure and thank you once again for the opportunity.

Pallavi: On that note, we come to the end of this episode. Thank you to all our listeners for joining us in this insightful discussion. Stay tuned for our next podcast. Until then, if you would like us to cover any specific topic for discussion, please feel free to share it with us on our website or markets.eyindia@in.ey.com. Thanks for tuning in and goodbye.

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