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The outlook for the Indian economy has changed significantly since Union Finance Minister Nirmala Sitharaman rose to present the first full Budget of the third Narendra Modi government in July 2024. The last available gross domestic product (GDP) growth number then was 8.2 per cent for 2023-24. Economic growth has since slipped and the Indian economy expanded by 6 per cent in the first half of the ongoing year and the official growth projection for the current financial year is 6.4 per cent. Against this backdrop, the Union Budget for 2025-26 — Sitharaman’s record eighth consecutive Budget — was presented on Saturday, which proposed several measures, including ease-of-doing-business initiatives, to boost economic prospects.
The Budget focused on four major engines — agriculture; micro, small and medium enterprises (MSME); investments; and exports. The biggest highlight of the Budget, however, was the relief extended to the middle-class taxpayers. According to the proposal, no income tax will be levied on income up to Rs 12 lakh. The slab rates have also been changed under the new regime.
As Sitharaman noted in her speech, taxpayers in the new regime with an income of Rs 12 lakh will get a benefit of Rs 80,000. People in higher slabs will also benefit. The benefit for a taxpayer with an income of Rs 25 lakh, for example, will be Rs 1,10,000. The government, as a result, will forgo revenue worth Rs 1 trillion. The impact of tax relief was visible in the stock market with increased investor interest in consumer-facing companies. Shares of Maruti Suzuki, for example, went up by about 5 per cent in trade on a day when the benchmark index, BSE Sensex, remained flat. Further, to increase the ease of paying taxes and simplify the tax law, the government will introduce a new income-tax Bill next week.
The relief to the middle class was extended without compromising on fiscal prudence. The fiscal deficit for the ongoing year is pegged at 4.8 per cent of GDP compared to the Budget Estimate of 4.9 per cent of GDP. The fiscal deficit for the next financial year is projected at 4.4 per cent of GDP. Assuming the government attains the target, it will fulfil the promise made in the 2021-22 Budget. Sitharaman had then said that the government intends to bring down the fiscal deficit to a level below 4.5 per cent of GDP by 2025-26. The fiscal deficit in 2020-21 had increased to 9.2 per cent of GDP because of the pandemic-related disruption.
The statement under the Fiscal Responsibility and Budget Management (FRBM) Act shows, and as noted by Sitharaman in the July Budget, the fiscal anchor will move to debt-to-GDP ratio. “The choice of fiscal anchor aligns well in the context of sustained efforts of the government to promote fiscal transparency through proper disclosure of off-budget borrowings,” noted the statement. The FRBM Act, as amended in 2018, had both fiscal deficit and debt targets with an end date. However, from 2026-27, the government would keep the fiscal deficit such that the central government debt remains on a decline path.
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The FRBM statement has given different scenarios for the debt trajectory. In the worst-case scenario, assuming a 10 per cent nominal growth and mild consolidation, central government debt will move from 57.1 per cent of GDP in 2024-25 to 52 per cent in 2030-31. Assuming a nominal growth of 11 per cent and aggressive consolidation, the debt will decline to 47.5 per cent during the same period. The government will aim to attain a debt level of 50 per cent of GDP with a possible deviation of 1 percentage point on either side by March 2031.
Among other important announcements, in agriculture, for example, the Budget proposed a new programme called the “Prime Minister Dhan-Dhaanya Krishi Yojana”. In partnership with state governments, the programme will cover 100 districts with low productivity. The aim is to increase productivity, promote crop diversification, and enhance post-harvest storage. The programme, which is expected to benefit 17 million farmers, will also facilitate long and short-term credit.
Further, the government will launch a six-year plan to increase pulses production. Central agencies will procure three pulses (tur, urad and masoor) as much on offer over the next four years from farmers who get into an agreement with the agencies. The proposals are aimed at increasing production and productivity to not only augment rural incomes but also contain prices. Food prices have been driving the headline inflation rate in recent times, complicating policy choices for the Reserve Bank of India.
To boost the MSME sector, which contributes 36 per cent to manufacturing, the Budget has proposed to increase the limit for classification to help them increase scale and attain efficiency. Customised credit cards will also be issued to micro-enterprises registered on the Udyam portal with a limit of Rs 5 lakh. This is aimed at improving the availability of operational credit for small enterprises. A new scheme will also be launched for women entrepreneurs. To take the “Make in India” programme forward, the Budget proposed setting up of a National Manufacturing Mission, which will cover small, medium and large enterprises.
In terms of investment, while the capital expenditure allocation has been pegged at Rs 11.21 trillion, an increase of about 10 per cent from the RE, there is a renewed stress on public-private partnership (PPP). All infrastructure-related ministries will be expected to come up with a three-year pipeline of projects to be implemented through this mode. PM Gati Shakti portal data will also be provided to the private sector to assist in this effort.
Further, the government will launch the second asset monetisation plan between 2025 and 2030 to plough back capital worth Rs 10 trillion in new projects. The Budget also has proposals to implement urban sector reforms and reforms in the power sector. Sitharaman also announced a Nuclear Energy Mission, aimed at developing small modular reactors (SMRs) with an allocation of Rs 20,000 crore. The target is to have five indigenously developed SMRs operational by 2033.
Sitharaman made several announcements to increase the ease of doing business. In this context, the current model of bilateral investment treaties will be revamped to make it investor-friendly. A high-level Committee will be set up to review all non-financial sector regulations, certifications, and permissions. Reduction in compliance burden, as also highlighted by the latest Economic Survey, is aimed at improving the business environment. The finance minister also proposed measures to increase activities such as ship-leasing units, treasury centres of global companies, and insurance offices in the International Financial Services Centre.
As promised in the last Budget, the finance minister announced a rationalisation of the Customs rate structure, including the removal of seven tariff rates. After this, there will be only eight tariff rates, including zero. However, appropriate levels of cess will be imposed to maintain effective duty incidence, except in a few items. She also announced a reduction in effective Customs duty on 40 items to provide relief to consumers and support domestic manufacturing. Rules will also be eased on assessment and compliance for importers. Further, to promote exports, the finance minister announced support for domestic manufacturers to integrate with global supply chains.
