In recent years, the government’s focus on capital expenditures has been notable. For the fiscal year 2022-23, a provision of ₹7.50 lakh crore was made for capital expenditures, which saw a substantial 33% increase to ₹10 lakh crore for the fiscal year 2023-24
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Abhinit Kumar
With the full-term budget for the fiscal year 2024-25 set to be presented by the central government in July 2024, there is a palpable anticipation among middle-class families for significant economic relief. Following the recent general elections, citizens have once again entrusted Prime Minister Narendra Modi with the mandate to lead the country for another five years, expecting continued efforts to accelerate economic development. Finance Minister Nirmala Sitharaman is now preparing to present the upcoming budget, which holds substantial implications for the nation’s economic trajectory.
In recent years, the government’s focus on capital expenditures has been notable. For the fiscal year 2022-23, a provision of ₹7.50 lakh crore was made for capital expenditures, which saw a substantial 33% increase to ₹10 lakh crore for the fiscal year 2023-24. This significant boost in capital expenditure was aimed at fostering infrastructure development, creating jobs, and stimulating economic growth. For 2024-25, a provision of ₹11.11 lakh crore has been made, reflecting an 11% increase over the previous year. While this increase is commendable, there is a strong argument for a more substantial hike, ideally at least 25%, to maintain and accelerate the momentum in capital expenditures. Such an increase would translate to a provision of ₹12.5 lakh crore, which could significantly enhance the impact on economic growth and employment.
Capital expenditures are crucial for any nation’s economic progress. They are investments made by the government in physical assets such as infrastructure, machinery, and buildings, which lay the foundation for long-term economic growth. In India, the fiscal year 2023-24 witnessed an impressive economic growth rate of over 8%. To sustain and further this growth rate, it is essential to continue and increase investments in capital expenditures. These investments not only spur economic activity but also lead to the creation of new employment opportunities—a critical need for a country with a large and growing workforce.
Over the past decade, accelerated development has had a transformative impact on India’s socio-economic landscape. Approximately 250 million citizens have been lifted above the poverty line, with many now joining the middle class. The poverty rate has seen a remarkable decline from 21.1% in the fiscal year 2011-12 to 8.5% today. This shift has significantly bolstered the demand for goods and services, contributing to economic growth. Moreover, the burgeoning middle class has played a crucial role in enhancing tax collection, which in turn funds public services and infrastructure projects.
Direct tax collection has been a notable area of growth, with a recorded increase of around 25%. The Goods and Services Tax (GST) collections have also shown impressive figures, surpassing ₹1.80 lakh crore per month on average. This steady increase in tax revenue underscores the expanding economic activity and the government’s efforts to widen the tax base. Additionally, the Reserve Bank of India (RBI) provided a substantial dividend of over ₹2 lakh crore to the central government for the fiscal year 2023-24. Public sector banks and enterprises have similarly contributed significantly, earning more than ₹5 lakh crore in profits and providing hefty dividends to the government. This marks a stark contrast to a few years ago when the government had to allocate substantial budget funds to cover the losses of public sector banks.
This comprehensive change has led to a significant reduction in the central government’s budget deficit. The budget deficit, which had exceeded 8% during the COVID-19 pandemic, is now expected to decrease to 5.1% in the fiscal year 2024-25. This improvement is a testament to the government’s success in increasing its financial resources while simultaneously controlling expenditures. Such fiscal discipline is crucial for maintaining economic stability and ensuring sustainable growth.
Despite these positive developments, there is a growing expectation among middle-class families for direct economic relief in the form of income tax cuts. The substantial increase in direct tax collection has largely been driven by this demographic, and providing them with tax relief could have a cascading positive impact on the economy. According to Indian economic philosophy, the tax burden on citizens should be as light as a bee’s extraction of honey from a flower. Increasing the disposable income of middle-class families directly benefits the economy by boosting demand for various products, leading to increased production and employment opportunities.
When middle-class citizens have more money to spend, they stimulate demand for goods and services, which in turn drives production. Increased production leads to the creation of new jobs and the expansion of manufacturing units. This growth cycle not only boosts the economy but also increases tax revenues, as higher production and consumption levels generate more taxable income. Reducing income tax for the middle class could also promote the formal economy. In several countries, it has been observed that lower tax rates encourage the growth of the formal economy, leading to increased tax collection even after reducing the rates.
Although India’s informal economy still runs almost parallel to the formal economy, the government’s push for digitizing economic transactions has significantly helped formalize the economy. The increased transparency and accountability resulting from digital transactions have contributed to higher tax collections, with GST collections reaching over ₹1.80 lakh crore per month. Therefore, the rapid growth of middle-class families is directly linked to the country’s economic development.
The growth of the middle class has a multiplier effect on the economy. Middle-class families are typically the most active consumers, driving demand across various sectors. Their spending on housing, education, healthcare, and consumer goods fuels economic activity and creates jobs. Moreover, middle-class households are significant contributors to the financial sector, investing in savings schemes, mutual funds, and insurance products. Their financial stability and propensity to save and invest are crucial for the health of the economy.
Enhancing the disposable income of middle-class families through tax relief would also support the government’s broader economic goals. For instance, increased consumer spending can lead to higher demand for housing, stimulating the real estate sector, which is a significant driver of employment and economic activity. Additionally, higher disposable incomes can boost investments in education and healthcare, leading to long-term human capital development and improved productivity.
Furthermore, the middle class plays a crucial role in driving entrepreneurship and innovation. With more financial resources at their disposal, middle-class individuals are more likely to invest in new business ventures, fostering a culture of innovation and entrepreneurship. This can lead to the creation of new industries and job opportunities, further contributing to economic growth.
As the government prepares the budget for the fiscal year 2024-25, it is essential to consider the potential benefits of providing economic relief to middle-class families. Such relief would not only enhance their financial well-being but also stimulate economic growth and job creation. The government’s focus on capital expenditures should be complemented by measures to increase the disposable income of middle-class citizens, thereby driving demand and fostering a more inclusive and robust economy.
The impressive growth in tax collections has provided the government with the fiscal space to consider such measures. Attractive tax collections enable the successful implementation of various schemes to support the poor. Therefore, the fiscal year 2024-25 budget should be designed with the aim of increasing the number of middle-class families, who have always been at the forefront of providing assistance to the poor. Middle-class families play a vital role in supporting the broader economy and ensuring sustainable development.
As Finance Minister Nirmala Sitharaman prepares to present the budget, the expectations of middle-class families for economic relief are high. By increasing capital expenditures and providing income tax relief, the government can stimulate economic growth, create jobs, and enhance the financial well-being of millions of citizens. The positive impact of such measures would extend beyond the middle class, benefiting the entire economy and ensuring a prosperous future for all. The upcoming budget presents an opportunity to reinforce the government’s commitment to building a robust and inclusive economy, addressing the aspirations of middle-class families, and fostering long-term economic growth.
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