The 2024 budget and the impact of the general election

First, Finance Minister Nirmala Sitharaman stressed in her Budget speech that the government wants to ensure that the benefits of economic prosperity are available to all Indians, regardless of religion, caste, gender or age, with a special focus on jobs, skilling, small and medium enterprises and the middle class.

Second, and more importantly, her development measures and aspirations are underpinned by the expectation that cooperation among countries will help achieve budgetary targets. States are supposed to be equal partners with the national government in the process of promoting economic growth and development.

The budget proposal has several measures that are relevant to the states. ₹The $1.1 trillion infrastructure drive, the development of industrial parks with states to boost manufacturing, urban development plans, and enhanced skills training are all projects that envisage close collaboration between the central and state governments.

But the path is likely to be somewhat uneven, distorted by realpolitik and the presence of incentives that may put strain on resource transfers to states.

With electoral politics casting a shadow over budget preparations, Andhra Pradesh and Bihar have been special beneficiaries for supporting the ruling coalition. In return, the government has provided special financial support to Chandrababu Naidu. ₹Andhra will get Rs 15,000 crore in aid from multilateral development agencies during FY25, with further aid to be increased in future. This is on top of grants to the state’s backward regions, capital contributions to stalled projects and future infrastructure spending. Curiously, Andhra, being a southern state, has been lumped with eastern states like West Bengal and Odisha in benefiting from the new Purvodaya scheme.

Similarly, Bihar is also developing road connectivity projects, power plants ( ₹21,400 crore), a tourism centre, industrial park, a new airport, a medical college and sports infrastructure.

To some extent, these allocations make sense from a development perspective, but in a climate where other states are underfunded, the politically motivated largesse starts to look decidedly odd.

Tax deferrals to states have grown by just 13 percent compared to a growth rate of over 16 percent in FY24. Non-tax deferrals, on the other hand, have grown by 10.4 percent compared to a growth rate of less than 1 percent in the previous year. However, state budget data shows that the growth rate of total financial transfers (tax deferrals and grants) from the Centre to states has been slowing every year.

This squeeze is further intensified by the introduction of incentive frameworks as a pre-condition for accessing central government resources. For instance, the government is working on introducing a new and more attractive Easy to Do Business framework. In this effort, states will need to be key partners. However, instead of adhering to its earlier promise of cooperative federalism, the central government has adopted a carrot-and-stick approach: “… states will be incentivized for implementing the Business Transformation Action Plan and Digitalisation.”

Finance Minister Sitharaman even acknowledged that many of the reform measures would require close collaboration between the central and state governments, saying “…the development of the country depends on the development of the states.”

But amid this cash crunch, the Budget calls on state governments to cut stamp duty, perhaps one of the largest sources of revenue for many states, so they are unlikely to comply unless there are other options.

Ironically, the budget proposal to cut stamp duty contradicts the recommendations of the 15th State Finance Commission, which asked states to raise more revenue by increasing stamp duty and registration fees.

The fund allocation framework conceptualised by the 15th Finance Commission and adopted by the Government envisages an economic model which assumes that states have the requisite powers to earn tax and non-tax revenues independent of the prevailing economic environment.

In an economy plagued by stagnant manufacturing and agricultural output, rising unemployment, falling real wages, and sluggish consumption, states have limited options for raising revenues, which hurts state spending and is sure to affect poll results in times of economic stress.