In the five years that Ms Nirmala Sitharaman has presented her budgets, this may well be her best. She deserves several compliments. First, even though this was the last full budget before the 2024 elections, she steered clear of any populist spending even while granting significant concessions to different sections.

Unlike other political parties, the Modi government’s philosophy has generally been against the culture of giveaways and to focus instead on creating jobs and income through the multiplier effect from investments. Ms Sitharaman has once again stuck to this path of financial prudence.

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Second, she has successfully brought down the level of subsidies to release money for boosting capital expenditure.

Third, the middle class, the 430-million strong, vocal segment of India’s population whose income lies between Rs 5 lakh and Rs 30 lakh, estimated to grow to more than 715 million and constitute almost half of India’s population by 2030, has something to cheer at last, even though it may not be three full cheers.

Fourth, the government’s commitment to continue on the path of fiscal consolidation has been reaffirmed. There are quite a few other welcome features in the budget, but these I think are the most important. There are also a few disappointments, most notably the refusal to rationalise the structure of capital gains taxation. There was also no attempt to rein in the burgeoning centrally sponsored schemes (CSS).

In her budget speech, the word ‘development’ occurs 38 times, followed by ‘infrastructure’ which occurs 28 times and ‘growth’ which occurs 15 times. The message is unmistakable ~ the government believes that development and growth are to be brought via the medium of investment in infrastructure. Infrastructure has been the focus of this budget, as it was in the last two years also.

Capital outlay has been increased by one third over last year’s budget estimates (BE) of Rs 7.5 lakh crore, or revised estimates (RE) of Rs 7.28 lakh crore to Rs 10 lakh crore this year and if we include the grants given to the states for creation of capital assets, the effective capital outlay of the Centre soars to Rs 13.7 lakh crore, equivalent to 4.5 per cent of the country’s GDP.

Almost half of the Centre’s capex – Rs 5.17 lakh crore – will go to railways and roads, with railways getting Rs 2.4 lakh crore and road transport and highways getting Rs 2.7 lakh crore.

The effective capital expenditure has in fact more than doubled since 2020-21 from Rs 6.4 lakh crore, and if India has to transform as a developed country by 2047, this pace must not only be maintained but accelerated. It is high time that other political parties, notably AAP and Congress realise that the road to real growth is through investment and not through freebies.

Increase in capex has been possible only because the FM has drastically cut down the subsidies. Food subsidy has been reduced from Rs 2.87 lakh crore in FY23 RE to Rs 1.97 lakh crore in the current budget, and the fertiliser subsidy has been cut down from Rs 2.25 lakh crore in FY23 RE to Rs 1.75 lakh crore, while the petroleum subsidy has been reduced from Rs 9,171 crore to only Rs 2,257 crore. Thus, the total subsidy has been reduced by about Rs 2.1 lakh crore, as against the capex increase of Rs 2.7 lakh crore from the FY23 RE.

The subsidy bill soared during 2020- 21 to Rs 7 lakh crore, mainly on account of food subsidy of Rs 5.4 lakh crore. The government extended the free ration scheme under the Pradhan Mantri Garib Kalyan Ann Yojana till December 2022, and now it has been merged with the National Food Security Act (NFSA) that will provide free ration to 80 crore Indians, all of whom are not necessarily so poor that they cannot afford to buy food from the market. The NFSA will cost Rs 2 lakh crore to the Centre this year. A wasteful legacy of the Congress era, the Act requires a drastic relook as far as its scope and targeting are concerned.

The states have been incentivised further to accelerate their capital spending on infrastructure by extending the 50-year interest-free loans by one more year with increased outlay. They have been allowed a fiscal deficit of 0.5 per cent of GDSP over and above their fiscal deficit limit of 3 per cent for undertaking power sector reforms, in line with the 15th Finance Commission’s recommendations. Power sector remains the Achilles’ heel of our economy, and past attempts like UDAY have not helped resolve its deepseated structural problems which are tied to politics, and this incentive is unlikely to work.

For the middle class, a longawaited expectation was lowering the burden of direct taxes. I have commented elsewhere that the current tax slabs need to be reworked to adjust for inflation which has become a new normal of our times, driven by the effects of supply disruption caused by the ongoing war between Russia and Ukraine still without an end in sight, along with rationalisation of the new tax regime which has so far failed to enthuse taxpayers. The FM has tried to incentivise the new tax regime by hiking the threshold of taxable income from Rs 5 lakh to Rs 7 lakh, thereby providing substantial relief to the middle class reeling from the dual effects of inflation and layoffs.

She has also lowered the number of slabs from 6 to 5, but these may still be one too many and hence not incentive enough to switch from the old to the new regime. Even with the standard deduction of Rs 50,000 now allowed in the new regime it may still not be beneficial to the taxpayers at the lower end, if one avails all the allowed deductions under the old scheme.

Maybe this is the FM’s way of preparing the taxpayers for a future in which the old tax regime will be junked and the new regime, now made the default regime, will be compulsory. For this, the slabs need to be further rationalised and an automatic mechanism embedded to adjust these for inflation in case it exceeds the RBI’s inflation target of 4 per cent.

Middle class has been given certain other benefits like doubling the caps on Senior Citizen’s Saving Scheme and Senior Citizens’ Monthly Income Scheme to Rs 30 lakh and Rs 9 lakh respectively.

Introduction of a savings scheme for women up to Rs 2 lakh with 7.5 per cent fixed interest rate may now force some banks to rethink and revise their interest structure upwards to prevent a possible flight of deposits. Some criticism has been made against reducing the surcharge for the super-rich ~ those earning more than Rs 5 crore a yearthat will reduce the highest tax rate from 42.7 percent, one of the highest in the world, to 39 percent, which is still very high. It is a fact that capital always seeks taxfriendly destinations.

Last year alone, more than 8,000 high net-worth individuals (HNIs) had given up their Indian passports and left India along with their capital to settle and invest in other countries. Whether this measure will arrest this trend is still doubtful.

One big disappointment was the failure to rationalise the structure of capital gain taxation which is arbitrary and ad-hoc and distorts the market.

Not only are there a multiplicity of rates and holding periods for different types of investments, but some have benefits for inflation indexation which others do not have. Different tax rates in respect of tax assets move resources from one to another, and the same happens with different holding periods.

Given that between March 2020 and December 2022, over 100 million Demat accounts were opened in India, expanding the base of retail investors in the stock market hugely, rationalisation of the capital gains would have helped investors and increased government revenue from stock market activities.

Another negative in the budget was the refusal to rationalise the CSS. These schemes may get votes but cause huge waste of scarce resources that can be put to much better use.

Given that the government’s committed expenditure on salary, interest, and pension plus the expenditure on subsidies and defence constitute almost two thirds of our revenue expenditure, the budget leaves very little fiscal space for manoeuvring by the FM.

Every CSS is in urgent need of evaluation before their numbers could be drastically reduced through merger, convergence, or closure – an issue every finance commission has red-flagged since they had started ballooning.

While allocations have been reduced for some, like MNREGA which is demand driven, from Rs 89400 crore in RE 2022-23 to Rs 60000 crore in BE 2023-24, the number of schemes has been increasing every year.

There are now 59 schemes, including four umbrella schemes which bundle a large number under each umbrella, as against a total of 42 schemes in 2021-22.

However, the negatives in the budget have more than been made up by continuing the efforts towards fiscal consolidation.

The FM has stuck to the difficult fiscal deficit target of 6.4 percent of GDP in the current fiscal and plans to reduce it to 5.9 percent during 2023-24, and to bring it down to 4.5 percent by 2025-26. If she can do this while continuing to increase the capex, it would be nothing short of a miracle.    

(The writer is a commentator, author and academic. Opinions expressed are personal)