Budget 2025-26: Fiscal Prudence with an Accent on Consumption

In terms of Article 112 of the Indian Constitution, a statement of estimated receipts and expenditure of the Government of India must be laid before Parliament in respect of every financial year from 1st April to 31st March. Hence, in this sense the budget is routine. But the budget provides an indication of the state of the economy, priorities of the Government and the use of instruments to realize identified objectives, influence direction and pace of the economy. Hence, the budget, which is a document of estimates based on assumptions and strategies to achieve those estimates, transcends a public statement of expected government revenues and scheme expenditures over a period of one year.

Macro Perspective

The Union Budget 2025-26 was presented on February 1, 2025 at a time of heightened geopolitical dynamics and a paradigm shift from globalization to protectionism, with tariffs emerging as a significant component of policy frameworks. India is currently experiencing a cyclical slowdown in economic growth, driven by fiscal consolidation measures and a deceleration in credit growth due partly to the RBI’s macro-prudential tightening of consumer lending. In this overarching macroeconomic framework, the FM was required to address the challenging task of maintaining fiscal discipline while meeting the revolution of rising expectations of citizens and businesses- a task handled adroitly.

Budgetary Measures

Development measures focused on Garib, Youth, Annadata and Nari are contextually significant and welcome. There are significant measures here to boost agricultural production and productivity.

Agriculture- Integral Part of the Growth Saga

Agriculture, which accounts for about 18 % of GDP and 54% of employment, continues to provides the mainstay of the Indian economy. Towards this end, Dhan Dhanya Krishi Yojna encompasses contextually significant measures like a rise in Kisan Credit Card limits for farmers, fisherman etc. increased from `3 lakh to `5 lakh, 6 year mission for pulses and Agri plan to cover 100 districts with low productivity in phase 1.

MSMEs- Small is Big!

MSMEs have rightly been identified as “the second engine of growth” because of the implications of 5.7 crore MSMEs for economic growth, structural transformation and distributive equity. There are welcome initiatives like increased loan guarantees to micro entrepreneurs, loans to startups in 27 focus sectors at 1% guarantee fees, term loans upto `20 crore for export MSMEs, customized credit cards for Udyam registered MSMEs and Fund of fund for startups, another `10,000 crore to be setup. The Credit guarantee cover has been enhanced from `2 crore to `5 crore for MSME. Startups will have credit guarantee of `10 crore to`20 crore, well-run MSME – `20 crore, Micro enterprise will have `5 lakh limit of credit card, development of clusters and manufacturing of toys, Footwear and Leather sector scheme- to generate employment to 22 lakh people and generate investment of `4 lakh crore, exports over `1.1 lakh crore and National Manufacturing Mission for MSMEs. These broad spectrum measures will provide an impetus to MSMEs and help them move to a new and higher level.

Adherence to Fiscal Deficit Glide Down Path

India’s deficit and debt dynamics imperil the macro-economy. Vitor Gaspar, IMF justifiably maintains “Countries around the world face a fiscal policy trilemma: pressure to increase spending, public resistance to higher taxes, and risks from rising debt levels. Countries must navigate these challenges to maintain economic stability and growth.”

Since 2022, India’s fiscal deficit has steadily declined. The government more than met its fiscal deficit target of 4.9% of GDP despite lower nominal GDP growth than budgeted, as stipulated in the medium-term budgetary policy-cum- fiscal strategy statement with the FY25 budget. Higher direct taxes (which rose from 52% in FY22 to 57.5% of gross tax revenue in FY25) and increased non-tax revenues offset shortfalls in corporate taxes and excise duties. Further, reducing capital expenditure helped counterbalance the rising food subsidy costs. Entirely in line with our expectations, the fiscal deficit number for FY25 came in at 4.8% – below the budgeted level of 4.9%- and for FY 26 at 4.4%. The new fiscal consolidation framework, which will provide greater macroeconomic stability, is greatly welcome for the domestic economy and will send the right message to global investors, multilateral institutions and the global rating agencies.

Relief to the Middle Class

Persistent high inflation has weighed heavily on households’ disposable income, especially of urban Indians, whereas the private urban consumption expenditure took a heavy toll. As visualised by us and strongly stressed on multiple channels and in various mediums, the middle class has been given a welcome relief with no Income Tax upto `12 lakhs Income. For salaried persons, it will rise to `12.75 lakhs by factoring in standard deduction. This initiative will provide significant relief to the middle class, which has been hit hard by the inflationary spiral and shore up consumption and investments. Further, there are several well-conceived reforms in the realms of TDS and TCS.

Consumption Boost

No wonder, then, this development salubriously impacted stocks across multiple sectors, including FMCG, automobiles, consumer durables, insurance, green energy, among others. Meanwhile, railway, defence, and infrastructure stocks took a hit because of the governments capex hitting a plateau. However, continuing infrastructure investments will “crowd-in” private investment and make growth robust and sustainable over the medium- term. Electric vehicles (EVs), high-end imported bikes and jewellery benefit because of lower import duty as do several life-saving medicines. Second SWAMIH Fund will facilitate completion of 1,00,000 stalled homes. These welcome measures are reminiscent of what William Shakespeare (1564–1616) wrote eloquently in The Merchant of Venice, Act IV, Scene I “The quality of mercy is not strained; It droppeth as the gentle rain from heaven Upon the place beneath. It is twice blest; It blesseth him that gives and him that takes”. Viewed thereof, this far-reaching consumption booster measure like the quality of mercy will benefit both the tax payer and the Government by reducing tax evasion and tax avoidance, improving compliance and incentivising people to work and pay their legitimate dues to the Government.

Conclusion

In sum, this Budget is marked by cross-cutting strategically important themes of fiscal prudence, economic growth, structural transformation and distributive equity.

In view of the ravages of the inflationary spiral and the shrinking disposable income, the enhanced income tax limit will be welcome across the development spectrum. The trade package will help India’s exports in an external environment of geoeconomic fragmentation and uncertainty triggered by President Donald Trump’s tariff policies. This Budget has been unjustly slammed as “Bihar-centric, band-aid for bullet wounds”. There is certainly no end to expectations and the wish- list of various sectors and classes- “yeh dilmaange more” (this heart yearns for more)! But given the heightened global dynamics and the macroeconomic changes, the element of continuity and change, welcome relief to the middle class, new Income Tax Bill to simplify tax regime and reduce compliance burden, advancing fiscal prudence while significantly shoring up consumption, and the need to reconcile diverse- at times conflicting – elements of the fiscal calculus, the FM has done the best of a difficult task by its responsiveness to the “voice of the people”. Not too bad!

ABOUT THE AUTHORS

Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings is globally recognized as an expert in the Indian economy, banking, MSMEs, rural credit, financial inclusion, etc. He has over 300 publications, including in The Business Review (Cambridge), Journal of Economy and Business (Bulgaria), Occasional Papers (RBI), The Indian Banker (IBA), Bank Quest (IIBF), CAB Calling (RBI), The Economic Times, Financial Express, Times of India, Hindu Business Line.

Mrs. Archana Choudhary, IRS, is former Principal Director General of Income Tax (Pr. DGIT) with 36 years of service. In her distinguished career, she worked across geographies and areas, viz., assessment, appeal, investigation, administration, judicial processes, and training. A recipient of the gold medal for academic excellence at the Lal Bahadur Shastri National Academy of Administration (1987), she did her Mid-Career Training at the Maxwell School, Syracuse University, USA and the Indian Institute of Management, Bangalore (IIM-B).

My Take

Good Budget within its Constraints, considering that it is Not the Best of Times, when ‘Bold’ may not be ‘Beautiful’!

by Navin Berry

This is not an economist speak, nor a political commentary. But, a perspective that captures the spirit of our times.

The economic survey this year treaded an introspective path, fully realising the imperative of private sector unleashing its strengths to give a new momentum to growth. To this extent it sought to unshackle the private sector by suggesting to the government to “get out of the way”, effectively thereby restoring confidence among the investor community.

The budget has made more resources available some as disposable income to individuals and others across startups, MSME, and others. But how much does this translate into action? From a government perspective, read bureaucracy, and other government agencies, how much they will get out of the way, bring transparency in enforcing laws; while the allocations alone have been comprehensive, the success will lie in their implementation. Is it time for DOGE type mechanism that monitors the true implementation and follows up to measure the success of each vertical? Allocations alone do not guarantee outcomes! The FM has bet big on private sector spending, unleashing the animal spirits and perhaps, thereby, creation of more jobs. How much of this will happen rests on hope?

The Budget is not more of the same, but an upgrade on the same. It has taken its visions within the established framework to higher goals. It may not have broken new ground, as some may have expected as the media had been anticipating a new kind of a break, similar to possibly the 1991 budget. But then, are these the best of times given the global headwinds. Economists expecting to break new ground would be similarly disappointed, as to say that the size of the economy looks stagnant, not growing adequately to achieve the goals of a Viksit Bharat.

As an annual statement of an ongoing exercise, this being her eighth consecutive budget, the finance minister has created her own niche and flair. There can always be, and some of it regretfully, that it is the job of the treasury benches to thump in approval, and for the opposition to cry foul, as being simply band-aid for deeper wounds. It may well be. But there is much good within the ongoing parameters that does augur well. She has perfected her art of presentation, confident in what she is doing. Obviously, she has enjoyed the Prime Minister’s confidence, that has enabled her to stay on in this same portfolio for as long as this. It is important to see both sides, how much it has achieved, and where it is lacking. Balancing opinion is essential to providing pronouncements.

As the PM has said, it does well to provide relief to the middle class, a first in many years that one can recall. It does provide a template for stimulating growth among the entrepreneur and the MSME sectors. If the level of governance and oversighting can become more transparent, more as per an open book of rules and regulations, bringing more trust among the investing public, it could unleash some of the animal instincts of the private sector.

Pathbreaking is the announcement of changes in how we tackle investment in nuclear energy. Given that this could be the future, given our need to cut back on using fossils, this could well pave the pay for more investments in this sector, also opening India for collaboration with US and the West. This could well have far-reaching impact on the overall economy.

There is an opinion that the budget does not address development of the human index, not allocating enough to what should be priority areas, like education and health. If one recognizes the constraint on resources, the need to ensure fiscal prudence, there is a big balancing act that is undertaken that cannot satisfy every chain of thought. There would be people who say the defence sector needed more allocations, others may flag another area.

Overall, should it address individual interests. Like setting up of an airport in Bihar? Does that bring down the overall quality and tenor of a national budget? Announcement of an airport can be done, otherwise, without making a budget allocation? The allocations to Bihar are too blatant, given that this is the year for elections in the state. Releasing of advertisements aimed at the Delhi electorate the next day, though it was the party that did it, could be smart politics, clearly aimed at vote garnering politics.

The budget is forward looking, but as said earlier, it will need an effective mechanism to oversee implementation. Like the creation of 50 world class destinations. The then government had announced 12 destinations when the late Madhav Rao Scindia was the tourism minister. Only the number has increased, this time, from 12 to 50! Which, too, is good, except we need to see this implemented. The ‘devil’ is always in the implementation. Is it possible, the PMO delegates this responsibility to a clearly marked agency, perhaps like Niti Ayog, to report on real ground successes in achieving such programmes, and making such reports public, thereby naming and shaming the defaulters! These destinations, in themselves, carry the promise to create more business opportunities, more jobs across the value chain.


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