Budget: Election results and voter concerns may give Sitharaman some clues

Many of the proposals and measures are probably already in the final stages of being finalised and all that remains is to incorporate last-minute suggestions from party workers, update data and put the finishing touches on Finance Minister Nirmala Sitharaman’s comments.

There is another source of information that the Treasury may want to assess as it draws up the final contours of the new government’s first budget: the outcome of the recent general election.

The ruling Bharatiya Janata Party (BJP) had claimed in a leadership meeting that it would gain 67 seats from 303 in 2019 to 370, but in reality it lost 63 seats, forcing it to turn to its coalition partners for support. The biggest cuts were in Uttar Pradesh, Maharashtra and West Bengal, where its seats count fell by more than half.

Much newspaper space and airtime has been devoted to analyzing the myriad factors that will lead to the outcome of the 2024 Lok Sabha elections. As always, there is probably no one specific reason but rather a multi-layered constellation of causes. Of those multiple factors, three will inevitably factor into the budget formulation process:

First, although Indian Lok Sabha elections are national in nature, in reality voting patterns vary from state to state. This was accepted as a given for more than two decades from the late 1980s, when the era of coalition governments began, and continued for some time afterwards.

But the BJP’s majority position in Parliament over the past decade has called that theory into question. The 2024 general elections seem to signal a return of the trend towards a differentiated approach, casting doubt on the emerging belief that the voting behaviour of the Indian electorate is anything close to a unified national movement.

This also has major implications for fiscal federalism, including the central government’s use of devolution of funds as a negotiating tool.A report released by Motilal Oswal Financial Services on July 4 on fiscal data for 20 states (accounting for 93-94% of all state budgets) highlighted the central government’s frugality.

According to the report, total fund transfers (tax deferrals and grants) from the Centre to states are set to grow by just 2.5% in 2023-24, in contrast to a 4.9% increase in the previous year. Even more shocking, grants from the Centre to states are set to fall by nearly 22% in 2023-24, compared to a modest 4% increase in the previous year. This fall in grant transfers over the year is likely to have impacted the expenditure of many social sector schemes.

Grants are transferred from central funds to states under Article 275 of the Constitution. Successive Finance Commissions have sought to correct the vertical imbalance between the Centre’s taxing powers and the states’ expenditure responsibilities by recommending a combination of tax devolution and grants-in-aid.

But states have always preferred devolution of higher taxes, which is their constitutional right, over subsidies that they perceive as discriminatory. The 15th Finance Commission, while recommending around 20% of devolution as subsidies, has introduced performance criteria as a condition for devolution, which may reinforce this perception (and stoke fears of centralization) and ultimately lead to it.

The second strongest message coming from voters was concern about jobs and incomes. Pre-budget presentations to the government and several research reports have recommended government support for labour-intensive industries such as textiles.

To be fair, the government’s Production Linked Incentive Scheme, which includes textiles as one of its expected outcomes, is focused primarily on man-made fibres such as polyester, acrylic and viscose fibres.

But synthetic fiber manufacturers have largely automated their operations over the years, reducing the need for additional staff. Moreover, the plan has so far made patchy progress, forcing the government to drop hints at an expansion into the apparel sector.

While the apparel sector certainly holds promise, the handloom industry may be better placed to meet the government’s job creation ambitions. The Ministry of Textiles acknowledges in its annual report for 2022-23: “One of the largest sectors in terms of employment potential, the handloom industry plays a vital role in the country’s economy, with 2,377,000 looms producing for both domestic and international consumption.”

The third signal emerging from the ballot box is on capital spending: the government has front-loaded and bold infrastructure investments but has failed to provoke the desired investment response from the private sector that would have generated additional jobs.

Numerous papers and editorials have pointed out several tangible and intangible obstacles to increased private investment that the government needs to take note of. Moreover, to make capital expenditure more effective, the government can look inward and force key ministries such as the Ministry of Northeastern States Development to spend their allocated capital budgets.