Finance Minister Nirmala Sitharaman crafted the budget around four key targets of accelerating growth, promoting inclusive development, enhancing private investment, uplifting household sentiments including by income tax reform to enhance income in the pockets of middle-class consumers- those earning up to Rs 1.2 million a year, who account for over 80 percent of the total individual income tax payers
Staying on the path of fiscal consolidation the biggest hit
The biggest step towards accelerating growth was taken by scaling down the fiscal deficit from 4.8 percent of GDP this year to 4.4 percent of GDP in 2025-26. Sadly, no further timeline exists for reducing FD to below 4 percent – a necessary step to contain inflationary pressure and enhancing the ability to borrow sustainably by creating fiscal reserves to fight future economic disruptions. Instead, there is a bland commitment that FD will be aligned to gradually reduce the public debt of the Union government from about 57 percent of GDP presently (RBI statistics), to below 50 percent by 2030-31.
The new fiscal target is a debt to GDP ratio of 50 percent – significantly higher than the 40 percent of GDP earlier for the Union government, when FD was targeted. Whether the year-to-year flexibility inherent in the new mechanism will be used productively to keep inflationary pressure at bay while maximizing output, only time will tell. It is, however, reassuring that the focus on enhancing investment outlays continue with the revenue deficit targeted to decline from 2.6 percent this fiscal to 1.8 percent of GDP next year. Consistency across expenditure, tax receipts post the Rs 1 trillion bonanza in Income Tax and targeted FD should have been explained better to enhance credibility of the rosy budget projections.
Inclusive economic development
The second target of “inclusive development” – at least in economic terms- has been a close favorite of the Modi government via a range of welfare measures – universal banking, using the extensive network of public sector banks, digitalization of payments and communications at competitively determined low charges using private sector smarts, direct transfer of benefits to 180 million farmers and free cereals with a splash of cereals for 800 million people. These build on top of traditional schemes to help the poor and low skilled – assured work for 100 days per year at public construction sites, nutrition assistance for women and children.
Lower tax rates & supply side incentives boost demand for investment.
The third target of enhancing private investment is related to the fourth of boosting household sentiment and putting more money in the pockets of consumers. Five initiatives feed into this target.
First, continuing fiscal consolidation will create the environment to contain inflation allowing the RBI to lower interest rates, thereby boosting investment sentiment. Once the Federal Reserve commences its rate cutting cycle in the United States – possibly by mid-year- assuming that President Trump’s policy initiatives end up helping rather than harming the US – the RBI would have more room to follow with lowered interest rates.
Second, the budget speech directs the commencement of another round of Public Private Partnerships. This initiative had leveled off around 2016 despite a rich research literature – the Kelkar Committee Report on PPP 2015 and earlier the India Transport Report 2014 (R. Mohan). Now each infrastructure ministry is required to develop at least three PPP proposals during the year.
Third, the budget speech is peppered with new measures to help private investment. The partial rationalization of custom duties to boost domestic production and lower costs, the focus on encouraging global supply chains, global capability centers and 100 percent FDI for Insurance Companies, all point to the recognition that the open economy model remains best for India- which is a positive for the growth of a competitive domestic private sector.
Fourth Nuclear energy is to be scaled up with an additional 100 GW of nuclear energy proposed by 2047 with “active partnership” of the private sector. The big obstacle to private partnership – the infamous, onerous liability conditions imposed on the supplier in the event of a nuclear accident, are to be rationalized, paving the way for private participation. A Nuclear Energy Mission for research & development of Small Modular Reactors is proposed to develop five indigenously developed SMR by 2033.
Fifth the success of the first Fund of Funds for financing startups, in which the first Alternative Investment Fund for start-ups managed to pull in financing of Rs 910 billion for an initial support of Rs 100 billion from government is to be repeated in a second round. Today’s start-ups could be future Unicorns unleashing a wave of innovation and good jobs to boot.
Areas of stranded reforms – future opportunities
- Some policy elements which cry out for reform fell through the floor. More disclosure about the transition from FD to debt to GDP ratio as the key metric of financial stability, would have been helpful in underscoring that transparency would not be compromised.
- The long-awaited push for privatization was also ignored. This sits awkwardly with the need to enhance the efficiency of public investments. In the past continued support to Air India and now to keep MTNL afloat, defies logic when private providers stand ready to provide better services.
- The expansive welfare measures remain centrally driven, rather than transitioned to become a core mandate of state governments. This is illustrated by a further increase in the number of major schemes (all sectors), which increased from 150 last year to 175 in this budget.
- The budget also reflects a recent and growing trend of large allocations for projects in state governments scheduled for elections. Bihar- which goes for election of the Legislative Assembly later this year – was the recipient of such favors. This creates the misimpression that capital investments are largely political in nature and not subject to comparative ranking on the efficiency of investment via rigorous technical analysis.
The import tax for cancer medicines and several other products, including intermediate goods for renewable energy was reduced to increase affordability, contradicting the principle of domestic protection aiding Atma Nirbharta. Or are these peace offerings to soften the brow beating stance of the United States (which accounts for 18 percent of Indian exports) and thereby avoid revenge taxation on its Indian imports.
Oversights and minor errors of commission notwithstanding, the 2025 Union budget is commendable for what it achieves: demonstrated responsiveness, as the finance minister asserted, to the pressing needs of the domestic economy in an ocean of global uncertainty.
First published in the Asian Age Feb 4 2025
Opinion India 