Budget 2025-26 is a mix of short-term measures for improving growth and medium-term measures for building expectations. The proposed development measures cover 10 broad areas focusing on garib, youth, annadata and nari through agriculture, MSMEs, investments and exports with citizen-centric initiatives for empowerment, capacity building and building trust. Considering the structural slowdown in the economy, the government must focus additionally on increasing employment of people at low income levels, manage inflation, increase productivity and promote new tech opportunities.

Personal income tax relief may lead to 0.3-0.5 per cent growth in consumption and around 20-30 basis points (bps) increase in growth of GDP if the entire benefit is used for consumption. Estimates are around 50 per cent of the relief amount will be saved. Given the moderation in growth in the current year and the expectation of continuation of the observed decadal trend rate of growth, we may still continue to see stickiness in growth. Nominal GDP growth assumed in the Budget is 10.1 per cent for 2025-26. If it holds, with WPI converging to CPI core and food inflation not showing signs of moderation, GDP deflator may end up close to 4 per cent reducing GDP growth to around 6 per cent.

The Budget skilfully manages the fisc, capital outlay and income tax cuts. Central debt levels are projected to come down by 0.7 per cent of GDP in 2025-26. Personal income tax collections are somewhat overstated after factoring in tax cuts. One hopes that the axe does not fall on capital outlay in the end to maintain the fiscal deficit target. Effective capital expenditure outlay makes a healthy increase from 13.2 per cent (RE 2024-25) to 15.5 per cent of GDP. Dividend assumption from the RBI looks optimistic. Probably Available Realised Equity as percentage of RBI balance sheet will be reduced this year. Interest payments to Revenue increases by 0.4 per cent. Monetisation is in focus again, but the stated target looks ambitious. Disinvestment numbers remain sticky.

Infra outlay

To improve defence preparedness, defence capital outlay has gone up by 12.5 per cent (over RE). Outlay on health and education shows an increase that is more than the rate of overall increase in expenditure. Shift of expenditure to primary healthcare and literacy and numeracy outcomes should take place. Outlay on railways, roads and rural development seems to be governed by the ability of these departments to absorb the outlay.

PPPs (public-private partnerships) have resurfaced, but require the government’s ability to allocate risks in a manner that is equitable and which the private sector can afford. Outlay on airports, shipbuilding, ship breaking, labour intensive sectors, tourism, funds for start-ups along with the Manufacturing Mission could catalyse investments in these sectors. Jal Jeevan Mission badly underperformed this year. The government should focus on reenergising this initiative.

Finally, the government has accepted that trust based economic governance is more important. It has decided to form a high-level committee to review regulations, certifications and licences. The Economic Survey had focused on this issue. This will enable the private sector (foreign investors also) to invest more in the country. By this, the government adds further to the ‘ease of doing business’. If the additional known risks to private investment are removed, private capex can improve significantly.

The decision to offer support to integration with global supply chains is significant. A review of our current position on tariffs and FTAs (free trade agreements) is required — perhaps, after an equilibrium is reached in the ensuing tariff war. Trade defence mechanism, as per WTO, requires to be strengthened. But steps proposed in the Budget on export promotion are not a day too late.

The focus on skill development must be even sharper. Some progress is seen in trying to make vocational training part of curriculum in schools. Why the private sector is not active in investing and managing ITIs, as expected, requires some soul-searching. Skills in tourism, construction and rural enterprises are lacking.

Incentivising small units

The Budget proposes to incentivise MSMEs, by providing greater access to credit, technology upgradation, easing their compliance burden and other support measures. All India Survey of Unincorporated Enterprises indicates that more than seven crore unincorporated enterprises are employing nearly 12 crore persons (self-employed as entrepreneurs and hired workers). Only one-fifth of these are covered by any normal channel of institutional credit or are on the radar of public agencies. Access to institutional credit, which was destroyed during the pandemic, must be provided — at least for those enterprises which have bank accounts and hence their cash-flows are known. Such capital must be collateral free and guaranteed by the government. To begin with at least one million such enterprises can be covered. The current programmes do not cover this set of entrepreneurs.

The focus of the Budget on agriculture is well-articulated. Renewed focus on R&D, extension, freedom to move perishables across the country and removing controls on export and stock-holding is critical. To technically upgrade rural industries, linkage with nearby ITIs is required. CSR resources must be used to ensure efficient marketing of rural products. The government should catalyse creating marketing structures like AMUL in perishables to enable the non-farm sector to improve their incomes.

Gopalan is former Secretary, Economic Affairs, and Singhi is former Senior Economic Adviser, Ministry of Finance. Views are personal

Personal income tax collections are somewhat overstated. One hopes that the axe does not fall on capital outlay to maintain the fiscal deficit target

Published on February 4, 2025