In this second installment of the Union Budget special edition, I examine how Finance Minister Nirmala Sitharaman has once again eschewed populism, explore her ten commandments of the “next generation reforms,” and identify crucial areas that, while having missed the reform bus this time, must be allowed to board at the very next stop.
Populism Imperatives
The elections for the Eighteenth Lok Sabha did not exactly go according to the ruling coalition’s script, resulting in the BJP’s dependence on NDA partners to form the government at the Centre. The boisterous Opposition, riding high on its promises of rewadis (freebies), and a “delete” button, romped home to its best electoral performance in the past three elections. Assemblies in Haryana, Maharashtra, and Jharkhand will go to the polls towards the end of the year.
Ideal Dole Out Conditions
No one would have begrudged Sitharaman if, amidst the diminishing political capital of the ruling dispensation, she had presented even a halfway populist budget interspersed with targeted freebies, particularly as her fiscal war chest provided sufficient elbow room. Led by strong growth in tax revenues, the tax buoyancy is 1.2 in the revised estimates for FY24, compared to 1.0 in FY23. This year, the dividend payout from the Reserve Bank of India to the Union government is a record high at Rs 2.11 lakh crore, compared to Rs 87,416 crore in FY23.
But Nirmala Sitharaman, eschewing all populism, has presented a budget aimed at reform, performance, and transformation while maintaining the highest degree of fiscal prudence and keeping leeway for fiscal shocks from the external environment. She rightly summed this up upfront in her budget speech: “The global economy, while performing better than expected, is still in the grip of policy uncertainties. Elevated asset prices, political uncertainties, and shipping disruptions continue to pose significant downside risks for growth and upside risks to inflation”.
Consensus and Collaboration: The path to reforms
This commentator gives FM Sitharaman 10/10 for the Union Budget, with three caveats:
- The promised calibrated reforms must be rolled out as soon as possible. The more the dithering and delay, the lesser the impact.
- The ruling dispensation’s diminished political capital in the Lok Sabha with a boisterous Opposition, loss of majority in the Rajya Sabha, and numerous states ruled by Opposition parties necessitate collaboration and consensus-building. It will be a tightrope walk, but the best reforms of the Narasimha Rao government came in the first three years when he led a minority government, as did those of Atal Bihari Vajpayee’s reformist coalition government.
- The announced reforms represent only a small subset of the larger Gestalt of reforms needed. If the ruling dispensation wants to get the reforms calculus right, it must not wait for the next budget to roll out more critical reforms that have not yet been articulated.
The Reform Calculus
The intended reforms are embedded in nine foundational priorities of the budget. I will write about them when I examine the priorities. For now, here is a brief outline of the proposed main reforms:
One, Competitive federalism: The finance minister has rightly emphasised that the effective implementation of most reforms hinges on consensus-building and collaboration between the Centre and the states, as the country’s development is contingent upon the development of its states. Therefore, to promote competitive federalism and incentivise states to implement reforms more rapidly, the FM has earmarked a significant portion of the 50-year interest-free loan for this purpose. This provides states with incentives to enact much-needed reforms.
Two, Economic policy framework: Sitharaman has promised to formulate an economic policy framework to delineate the overarching approach to economic development and set the scope for the next generation of reforms aimed at facilitating employment opportunities and sustaining high growth. This was needed yesterday and is thus timely. The framework must provide a pathway for inclusive, employment-generating, and sustainable double-digit growth for the next two decades and should be the first reform imperative of the government.
Three, Financial sector vision and strategy: The second key proposed macro reform is the development of a financial sector vision and strategy document to prepare the sector in terms of size, capacity, and skills. This document is intended to set the next five-year agenda and guide the work of the government, regulators, financial institutions, and market participants. This is an absolute necessity to meet the fast-growing needs of the economy. It should be given an institutional structure, undergo a mid-term performance review, and be renewed every five years with a new strategy.
Four, Direct tax regime reform: Finance Minister Sitharaman has reason to be pleased with the successful adoption of the simplified income tax regime. Fifty per cent of corporate taxpayers and two-thirds of individual taxpayers have already migrated to the new regime. This success sets the ideal platform for wholesale simplification and complete revamping of the direct tax regime and the antiquated Income Tax Act of 1961. Sitharaman has promised to complete this overhaul within six months – a tight timeframe, even assuming that considerable groundwork for ushering in the new direct tax regime has already been completed.
India needs a simple, easy-to-comprehend, easy-to-administer, and low-taxing direct tax code without loopholes or hundreds of confusing deductions.
Five, Indirect tax-custom duty reform: Building on the FY23 budget, in which Sitharaman reduced the number of custom duty rates, similar to the income tax reforms implemented within six months, she has now announced a comprehensive review of the customs rate structure. This review, set to be completed over the next six months, aims to rationalise and simplify the system for ease of trade, remove duty inversion, and reduce disputes. Such measures are essential if the country’s economy is to grow rapidly despite increasing global protectionism.
Six, GST reforms: Indisputably, despite the initial implementation hiccups, the Goods and Services Tax (GST) has emerged as one of the major reforms of Prime Minister Modi’s regime. A recent Deloitte India survey indicated that companies’ confidence in the GST reform has significantly increased, rising from 59 per cent in 2022 to 84 per cent in 2024. It is now time to up the ante: further simplify the GST regime, extend its coverage to other areas, particularly petroleum products, rationalise tax rates, provide an effective dispute resolution process, remove credit restrictions, adopt faceless assessments, and implement a compliance rating system. Sitharaman has indicated that to maximise the benefits of GST, she will work to further simplify and rationalise the tax structure and endeavour to expand it to the remaining sectors. We hope these reforms will be implemented soon.
Seven, Foreign Direct Investment: As the Economic Survey rightly points out, due to the difficult geopolitical scenario, the medium-term outlook for foreign direct investment (FDI) does not appear too promising. In FY24, India was affected by the global decline in FDI, with net FDI inflows decreasing from $42.0 billion in FY23 to $26.5 billion in FY24. However, gross FDI inflows moderated only slightly, by 0.6 per cent, from $71.4 billion in FY23 to just under $71 billion in FY24. Regarding the external environment, it is what it is. In light of this, Sitharaman has rightly emphasised reforms to simplify rules and regulations for foreign direct investment and overseas investments to (a) facilitate foreign direct investments, (b) encourage prioritisation, and (c) promote opportunities for using the Indian Rupee as a currency for overseas investments.
Eight, Factors of production reforms: Reforms aimed at improving the productivity of factors of production have suffered for decades due to disruptive politics and a lack of collaboration and cooperation between the Centre and states. To achieve the vision of a Viksit Bharat by 2047, India needs urgent reforms to achieve inclusive double-digit growth over the next twenty years. Sitharaman has rightly prioritised all factors of production—land, labour, capital, entrepreneurship, and technology—as key to improving total factor productivity and bridging inequality. To improve the lives of 160 crore Indians in 2047 (142 to 144 crore currently), India needs a unified focus on development from both the ruling dispensation and the Opposition, prioritising progress over partisan politics.
Nine, Land-related reforms: To consider just one factor of production – land – urgent land reforms are needed for both rural and urban areas. Land reforms have suffered enough since independence due to political gamesmanship, short-sightedness, and internecine bickering among political dispensations ruling at the central and state levels.
It is now time to stop the losses. Period.
All political parties must form a national umbrella to complete the articulated land reforms within three years, as stipulated by the finance minister, with or without fiscal stimulus. The finance minister has identified two broad land reform priorities for both rural and urban areas: (1) land administration, planning, and management, and (2) urban planning, land use, and building bylaws. A detailed list of land reforms is provided in paragraphs 99 (rural land reforms) and 100 (urban land reforms) of the budget speech.
Ten, Taxonomy of green finance: The world is in the unprecedented grip of climate change and global warming, with 18 per cent of the global population that resides in India suffering serious adverse consequences. In 2021, speaking at the 26th Conference of Parties (COP26) in Glasgow, Prime Minister Narendra Modi announced that India would achieve net-zero emissions by 2070, raise its non-fossil energy capacity to 500 GW by 2030, and meet 50 per cent of its energy demands through renewables. The G20 New Delhi declaration, hosted by India, further raised the bar by aiming for Net Zero by 2050.
However, the biggest challenge to achieving Net Zero—whether by 2070 or 2050 is a matter of detail—is securing the necessary funding. As a major climate finance reform measure, Sitharaman has reiterated the development of a taxonomy for climate finance. This taxonomy aims to enhance the availability of capital for climate adaptation and mitigation, supporting the achievement of India’s climate commitments and its green transition.
Missing the Reform Bus
In the foregoing paragraphs, I have delineated 10 major reform initiatives of NDA 3.0’s first budget. There are many more reform initiatives in the fine print of the budget speech and other budget documents. I also have a detailed wishlist of critical reform areas that ought to have been begun in the budget but missed the bus. Due to the paucity of time and space, I have enumerated just seven critical reform areas from my long wishlist. Here they are-
- The much-needed and long-awaited administrative reforms to inculcate greater service orientation to the governance, improve effectiveness and efficiency, and focus on delivery.
- Comprehensive anti-corruption reforms needed to save the nation. The corruption is eating the body fabric of the nation like a termite.
- Saving Indian Railways from the sudden death and extinction it stares at. 77 years of mismanagement have done irreparable damage to the erstwhile lifeline of the nation.
- Reforming the health sector to provide affordable and accessible Medicare and to reduce the humungous burden of the out-of-pocket expenses on the common man. The out-of-pocket expenses are driving down millions of families in absolute poverty annually.
- Radical reform of the education sector—primary, secondary, and higher—is desperately needed. The Indian government’s current focus on spending lakhs of crores on skilling initiatives highlights the simple truth: the education system has comprehensively failed to equip students with either the essential life skills required to navigate an increasingly complex world or the adequate professional skills needed for gainful employment.
- Interconnected water, sanitation, and solid waste reforms (both urban and rural) are urgently needed to save the lives of Indians. Despite comprising only 2.4 per cent of the planet’s landmass and possessing just 4 per cent of global freshwater resources, India supports 18 per cent of the world’s population—a number that is rapidly growing. This alarming disparity has placed the nation on the brink of “Day Zero,” with severe water stress affecting a significant portion of the country. Adding to the crisis, most surface water sources are severely polluted. Worse, the country is the biggest guzzler of the groundwater in the world and its groundwater is both depleting fast and is contaminated beyond redemption.
- The final reform needed is to tackle the pollution crisis—combating the harmful effects of pollution. Both indoor and outdoor pollution are severely impacting the nation. Indian cities and towns are among the most polluted urban centres in the world, with millions dying annually due to the detrimental effects of pollution. The situation is exacerbated by the fact that India lacks a comprehensive and accurate system for measuring pollution levels, making effective mitigation and reduction strategies even more challenging.
Having outlined seven key reform imperatives not addressed in the budget, for the sake of brevity, I will now focus on just three critical reform areas.
First, Administrative reforms: Puja Khedkar, who gamed a system as sacrosanct as the UPSC and took the civil services exam twelve times by changing identities and faking disabilities, is a symptom. The real malaise runs much deeper. Bharat needs urgent UPSC reform; the last meaningful reform occurred after the acceptance of the Kothari Commission Report in 1976.
But even UPSC reform can wait. What cannot wait is full-scale administrative reforms. Traditionally in Bharat, the Department of Personnel and Administrative Reforms has been headed by successive prime ministers at the Centre and chief ministers in the states. Nonetheless, the country is in desperate need of administrative reforms, for myriad reasons. The critical reform areas are – service orientation, accountability in place of entitlement, efficiency, effectiveness and eradicating corruption. I understand that in 2022, Prime Minister Modi got a blueprint for “next-generation administrative reforms.” It is time to put this blueprint in the public domain for the widest possible consultation, refine it, and implement it fairly and decisively.
Second, Reforms to tame corruption: Before India becomes Viksit, it must become less corrupt. Ideally, it must root out corruption from every branch of administration at the Central, state, city, and village levels.
This is not to say that India does not possess extraordinary, capable, effective, and efficient officials of sterling integrity and proven track records in implementation and delivery, across various branches of the governance setup—political, administrative, technical, and others. Indeed, these individuals are plentiful, and India has progressed to its current level thanks to their dedication and hard work. But, sadly, the truth is that this group is dwindling at an alarming rate, and unless corrective measures are taken swiftly, it will soon become an endangered species.
This trend does not bode well for the nation. It is time to undertake comprehensive reforms aimed at both preventing corruption and enacting robust punitive measures against offenders.
Third, Saving Indian Railways from extinction: Mark my words, ladies and gentlemen: as an Indian Railway man, I am going out on a limb to say that after being in a terminal coma for decades, Indian Railways faces imminent collapse. This is despite the fact that no other institution has been subjected to more committees and commissions aimed at reform and transformation, starting with the Robertson Committee (1902) and most recently, the Dr Anil Kakodkar High-Powered Committee on Railway Safety (2012), the Dr Bibek Debroy Committee on Railway Reforms (2014), and the E. Sreedharan Committee for bringing transparency in commercial decision-making in Indian Railways, including the delegation of commercial decision-making powers to general managers, including tenders.
This author, a long-time insider-outsider and outsider-insider of Indian Railways, has contributed to more than one such committee and was co-opted by the Railway Board to the Sreedharan Committee.
The more effort put into reforming the railways, the further it seems to slide back. And everything that could go wrong with Indian Railways has gone wrong.
Even massive year-on-year increases in capital outlay have only led to further erosion of passenger and goods traffic. Today, Indian Railways handles less than 10 per cent of national passenger throughput and around 25 per cent of freight. It has failed to expand its freight basket beyond traditional bulk items, failed to become an aggregator for small businesses, and is being deserted by its traditional freight clientele at an alarming rate. Even the completion of the Eastern Dedicated Freight Corridor and the near completion of the Western Dedicated Freight Corridor have not helped the railways halt the erosion of its modal share in freight. Roads and highways are running away with all the incremental traffic being generated by the world’s fastest-growing country by GDP.
Indian Railways ceased being the nation’s lifeline long ago. Soon, it will cease to be an ongoing concern. Nehru took a healthy Air India from JRD Tata; Modi returned a diseased Air India back to Ratan Tata. But sadly, there will be no such luck with Indian Railways. Unless a miracle occurs, Indian Railways will land in the government’s lap as a “dead baby.”
Why do I say this?
With or without creative accounting at the Railway Board level (whether you call it exchequer control during my time in the railways, or today’s practice of brazenly withholding railway funds like the Depreciation Reserve Fund), ever since my four-decade-long association with Indian Railways began, it has been spending more than one rupee to earn one rupee—translating to an operating ratio just below, at, or above 100. All capital expenditure in Indian Railways is either funded from the Gross Budgetary Support or through unsustainable debt.
The day the 8th Pay Commission Report is implemented, Indian Railways will have to resort to begging to pay salaries and pensions. Its much-touted reform, the Indian Railway Management Service (IRMS), has turned out to be a placebo—one that will kill the patient faster without providing a cure. This is the story of Indian Railways today. My humble question is, for how long?
In part three, I will delve into other areas of the budget, including—but not limited to—measures aimed at increasing rural and urban consumption and the neglected areas of health and education, which continue to receive less attention and funding than is necessary to achieve a Viksit Bharat by 2047.
To be continued
The author is Multidisciplinary Thought Leader with Action Bias, India Based International Impact Consultant, and key watcher of changing national and international scenario. He works as President Advisory Services of Consulting Company BARSYL. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
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