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The Union Budget 2025-26 seeks to address specific issues plaguing the Indian economy — flagging domestic demand, sluggish private investment and tepid wage growth leading to a slowdown in meaningful GDP growth. A closer look at the priorities and allocations would reveal that the approach is cautious, without the assurance that they would indeed address the underlying problems. The government has seized upon a double-edged sword — substantial tax breaks — to boost consumption and to drive growth, leaving it with little room to expand public spending on capital expenditure, which could have been another useful lever to achieve the same end. While putting more money in the hands of the middle class seems the right thing to do in a time of unrelenting inflation, the focus continues to be on fiscal consolidation with a targeted fiscal deficit of 4.4% of GDP in FY26, coming down from 4.8% in FY25. It has sought to project augmented direct tax receipts despite providing tax rebate incentives for a large segment of the salaried direct tax-payers. The expectation is that there would be better compliance with a greater use of technology, which was useful in increasing the direct tax revenue from a budgeted estimate of ₹11,87,000 crore to ₹12,57,000 crore (revised estimates) in FY25. The highlight of the Budget remains the move to ensure that taxpayers earning up to ₹12 lakh (excluding special rate income such as capital gains) have no tax liability due to the rebate provided. This is meant to boost demand among the salaried middle and lower middle-class sections, who get substantial benefits in the form of tax savings and could be expected to spur consumption. The Economic Survey had pointed to mixed trends in urban demand unlike sustained consumption growth in rural areas through this year, and this move clearly targets the problem. Also, there has been a clamour for relief from among direct tax-paying middle-class sections, who have had to cope with both rising inflation and indirect goods and service tax payments that squeezed their incomes; the Budget addresses this issue in good measure with tax incentives. In a way, this is also a response to resentment among the government’s own sympathisers, and can be read as a way to mitigate any loss of political support.
While the salaried middle-class sections would indeed benefit and welcome the move, it is not clear if this measure alone will stimulate demand to the extent of creating a strong virtuous economic growth cycle. This is because private investment in the economy has been stagnant, with the corporate sector showing little inclination to step it up. The Budget continues the trend of incentivising the corporate sector to do so — revenues from corporate tax as a share of gross tax collections are estimated to fall slightly from 25.4% in FY25 to 25.3% in FY26. But considering that corporates have shown little inclination to increase investment despite low corporate tax rates and increased profitability, the government should have adopted an alternative approach, perhaps gradually phasing out the tax incentives.
The Budget continues the trend of a high allocation on capex — albeit with a reduced share compared to the previous Budgets since the COVID-19 pandemic. Allocations in road transport (the Ministry) and telecom fell from 5.95% and 2.64% in RE for FY25 to 5.67% and 1.6% in BE26. Budgetary support for the Railways has also remained stagnant compared to FY25 RE. This is curious considering that the Railways have suffered a series of accidents in recent years and require a strong infrastructural boost. However, the government has done well to emphasise support for MSMEs with enhanced credit (guarantee cover increased from ₹5 crore to ₹10 crore) and startups (from ₹10 crore to ₹20 crore) besides schemes for the footwear and leather industry, toy sector and food processing MSMEs. The attention devoted to expanding clean energy generation is evident in the incentives provided to the electric vehicle and battery technology sectors in the form of duty exemptions on capital goods among others. In terms of allocations, expenditure is budgeted to increase by 0.24 points from 1.36% in FY25 to 1.6% in FY26 in the energy sector. This is indeed welcome, considering the strategic importance of this sector as the country transits to a climate-friendly economy. While allocations for rural development increased from 4.08% in FY25 RE to 5.24% in FY26 BE, those for major schemes such as MGNREGS fell — from 1.82% in FY25 RE to 1.7% in FY26 BE. Allocations have been increased in other schemes such as the PM Awas Yojana and the National Rural Livelihoods Mission. The MGNREGS is tested as a scheme that enhances rural incomes and allows the rural poor to spend more on consumer goods, and any effort to stifle it would be counterproductive to the goal of stimulating demand. With employment remaining a major issue in the economy, the Budget’s emphasis on social security for gig workers by arranging for identity cards for them and registration in the e-Shram portal, besides health care under the PM Jan Arogya Yojana, is welcome. While the Budget speech focused on skilling initiatives that would aid in youth gaining employment in an industrial world that is increasingly relying upon automation, the Employment Linked Incentive scheme, ambitiously launched last year, curiously did not find any mention in the Budget.
While the Budget has come up with measures that address the needs of the economy, there is too much left to hope built on imponderables, and too little riding on pragmatism.
Published – February 02, 2025 12:20 am IST
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Hope in the time of desperation: On the Union Budget 2025
