Key measures, including tax reliefs and incentives for private sector, reflect a balanced approach to making India a developed economy by 2047

A theme that reverberates in the Union Budget for FY 2025-26 presented by Finance Minister Nirmala Sitharaman on February 1, 2025, is ‘sustaining the momentum of high economic growth alongside sticking to fiscal consolidation’. During FY 2024-25, the GDP growth (gross domestic product) is estimated at 6.4 per cent which is more or less close to the 6.5 per cent - 7 per cent projected in the Economic Survey (ES) for 2023-24 presented by Sitharaman in the Parliament on February 1, 2024. For FY 2025-26, according to the Economic Survey presented by her on February 1, 2025, the GDP is projected to expand between 6.3 per cent - 6.8 per cent. On top of a growth of 8 per cent plus for three consecutive years beginning FY 2021-22 and 6.4 per cent during FY 2024-25, this is a fairly impressive number in sync with the overarching goal of making India a ‘developed economy’ by 2047. 

As for fiscal deficit or FD (excess of total expenditure over total receipts), in her interim budget presented on February 1, 2024, she had set a target of 5.1 per cent of the nominal GDP (NGDP). Subsequently, in the full budget for FY 2024-25 presented on July 23, 2024, she revised it downward to 4.9 per cent of the GDP taking into account the extra cushion of Rs 130,000 crore in the dividend transferred by the Reserve Bank of India (RBI) to the Central Government from its operations during the FY 2023-24 (the actual dividend transfer was Rs 210,000 crore against a provision of Rs 80,000 crore made in the interim budget).  

Going by the revised estimate (RE) presented by the FM on February 1, 2025, the FD for FY 2024-25 has turned out to be even lower at 4.8 per cent of the NGDP. Even as the total revenue expenditure at Rs 3698,000 crore is only marginally lower than the budget estimate (BE) of Rs 3709,401 crore, the RE for capital expenditure is about Rs 1018,000 crore - a significant Rs 93,000 crore less than the BE of Rs 1111,111 crore. Indeed, this is a major reason behind a reduction of one percentage point in the FD over the BE. In the budget for FY 2025-26, the FM has provided for a total expenditure of Rs 5065,000 crore which is a significant increase of 7.4 per cent over the RE for FY 2024-25 at Rs 4716,000 crore.

This includes capital expenditure of Rs 1121,000 crore, the remaining Rs 3944,000 crore being the provision for revenue expenditure. Sitharaman has received flak for going slow on investment. This is unjustified and out of sync with the underlying facts. We need to compare the budget provision with RE for FY 2024-25. On this basis, the provision of Rs 1121,000 crore is 10.1 per cent higher than the actual capital expenditure during 2024-25.

That apart, the position about the government’s capital spending has to be viewed in totality. In her Budget for FY 2019-20, Sitharaman had laid a roadmap for catapulting the Indian economy to US $5 trillion by 2024-25. In sync with this target, she had projected an investment requirement of over Rs 100,00,000 crore to build the infrastructure over five years. Of this, 39 per cent or Rs 39,00,000 crore was to come from the Centre and states each and the balance was Rs 22,00,000 crore from the private sector. The Centre’s actual capital expenditure was for 2020-21: Rs 439,000 crore; 2021-22: Rs 554,000 crore; 2022-23: Rs 750,000 crore; 2023-24: Rs 1000,961 crore and Rs 1018,000 crore for 2024-25.

Over five years, the total comes to Rs 3761,000 crore which is more or less close to the amount the Centre intended to contribute. Continuing with the above trend, a substantial allocation of Rs 1121,000 crore for 2025-26 shows the determination of the government to maintain the momentum of investment in building roads, highways, expressways, waterways, ports, airports, railways, irrigation projects, hospitals, schools, technical and research institutions and so on in symphony with strengthening the foundations of the economy for a VIKSIT BHARAT by 2047.

But, investment by the central government alone won’t be enough to give the intended boost to the economy. The States and private sector also need to do their bit. The Centre has been helping the former to boost their capital spend. During 2022-23, it provided them with 50-year Rs 100,000 crore interest-free loans. During 2023-24, such transfers were Rs 130,000 crore. For FY 2024-25, the transfers were kept at Rs 150,000 crore though the states didn’t fully utilize the amount.

For FY 2025-26 also, the budget allocation is kept at Rs 150,000 crore.  To promote investment in the private sector, the Centre has given a host of incentives to industries and businesses. Amongst others, these included a reduction in the corporate tax rate to 15 per cent for new manufacturing enterprises. In 2024-25, the tax rate on foreign firms was reduced from 40 percent to 35 percent.  But, the private sector has complained of ‘demand constraint’. Team Modi has addressed this as well.

In the budget for FY 2024-25, Sitharaman altered tax slabs under the New Income Tax (IT) regime besides increasing the standard deduction by Rs 25,000.

This resulted in a relief of around Rs 17,500 in personal income tax or PIT. In the budget for FY 2025-26, she has given a bonanza by announcing that a person earning Rs 1200,000 per annum need not pay any tax (taking into account the standard deduction of Rs 75,000/- now, the threshold comes to Rs 1275,000). Besides, she has altered the tax slabs to give relief even to persons earning more. Thus, a person earning Rs 2400,000 per annum will pay Rs 110,000 less.Consequent to these changes, the taxpayers will gain Rs 100,000 crore annually.

These savings will be distributed amongst a total of 7 crore persons who won’t have to pay any tax. This will give a big boost to demand. However, this by itself won’t give the required fillip. The government’s efforts need to be complemented by the owners of businesses. They should go for better distribution of income through measures such as keeping prices low, increasing salaries at the lower rungs, reinvesting profits for growth etc.

Coming to FD, apart from lower capital expenditure (than BE), the contribution of buoyant tax collections in containing it at 4.8 per cent of the NGDP during FY 2024-25, can’t be brushed aside. The RE of gross tax revenue (GTR) during the year at Rs 3850,000 crore is higher than the BE of Rs 3840,000 crore which itself was 14.6 per cent higher than GTR of Rs 3350,000 crore during 2023-24. For 2025-26, FM has kept the FD target at 4.4 per cent. To achieve it, she has set the GTR collections at still higher Rs 4270,000 crore.

This despite lower tax rates shows that the government’s efforts at broadening the tax base and ensuring tax compliance are working.                  In an interview, Sitharaman cited capital expenditure of 4.3 per cent as being more or less close to FD of 4.4 per cent. From a fiscal consolidation angle, this is a good sign as borrowings are used only for building assets. However, the government needs to go beyond by generating a ‘revenue surplus’ so that borrowings even for building capital assets can be cut. This is necessary as ‘interest payments’ alone account for over 25 per cent of total spending by the Centre.

(The writer is a policy analyst; views expressed are personal)