The Budget must be commended for being pragmatic and working within the constraints faced by the finance minister (FM). Over the past seven years, the government has consciously ramped up public spending, increasing it from 1.5 per cent of gross domestic product (GDP) in FY18 to 3.2 per cent of GDP in FY25 (Budget Estimates).
The absolute amount moved from Rs 3 trillion in FY19 to a FY25 budgeted figure of Rs 11.11 trillion. The biggest beneficiary of this capex jump was roads and railways, which drove economic growth. However, the days of 25 per cent increase in Central government capital expenditure are over, partly due to fiscal constraints but, more importantly, due to the limited absorptive capacity of roads and railways. They simply cannot spend more, and no other area seems poised to take up the slack. This is visible in the inability of the government to hit its capital spend targets in FY25, falling short by almost Rs 1 trillion. This gets further confirmed in the capital allocations in FY26 at Rs 2.52 trillion for the railways and Rs 2.87 trillion for roads, essentially flat compared to FY25. Another key driver of central government capital expenditure, defence capital equipment, remains stuck in the range of Rs 1.6 trillion to Rs 1.8 trillion. Given complex procedures and the lack of money, this number may not rise dramatically. The capital spend targets in FY26 at Rs 11.2 trillion is only marginally higher than the Rs 11.1 trillion original FY25 target.
Given the limited room to raise Central government capex, how does the FM get the economy to accelerate? First, try to boost private capex and then focus on consumption. For this, we need lower interest rates, stronger demand, and improvements in ease of doing business. The FM has addressed all three issues. By keeping to a fiscal deficit target of 4.4 per cent, she has shown fiscal conservatism and given the Reserve Bank of India the room to cut rates. We remain one of the few economies with a credible fiscal reduction game plan. Gross market borrowings are also only rising by 5.85 per cent to Rs 14.82 trillion. There is no incremental crowding out. Absent foreign exchange (FX) volatility, rates should be benign.
By providing an effective tax cut of Rs 1 trillion to the middle class, the FM will improve consumer confidence and boost consumption. The tax cut will jump-start the struggling consumption sectors, and, by enhancing demand visibility, encourage corporations to expand capacity.
The FM has also spoken a great deal about improving the ease of doing business, and with the establishment of a high-level committee to review compliance and regulations, combined with continuing efforts to decriminalise laws and simplify taxation, corporate confidence will be boosted further. Private capex will respond. Consumption will obviously benefit from the tax cut. Given the lack of space for government capex, the FM has done the needful to boost alternative drivers of growth, viz. private capex and consumption.
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The broad Budget arithmetic seems fine. The nominal GDP assumption of 10.1 per cent is reasonable. The only aggressive revenue assumption is for income tax. Net of the Rs 1 trillion cut, we are assuming a growth in collections of 22.35 per cent. Both corporate tax growth of 10.4 per cent and a disinvestment target of Rs 47,000 crore seem reasonable. Total expenditure is growing by 7.44 per cent in FY26, with revenue expenditure only growing at 6.65 per cent. If we take out the increase in interest payments, revenue expenditure is only growing at 3 per cent. The incremental expenditure of about Rs 3.5 trillion in FY26 has been entirely allocated to increased interest payments (Rs 1.38 trillion), increase in grants-in-aid for capital assets (Rs 1.27 trillion), and higher capital expenditure (Rs 1.02 trillion). A good mix, given that interest payments are non-discretionary.
Subsidies have been kept flat in absolute terms at Rs 3.83 trillion, with no increase over FY25 actuals. Allocation to MGNREGA has also been kept flat at Rs 86,000 crore. Where we have seen growth is in the Jal Jeevan mission, which is targeted to spend Rs 67,000 crore in FY26 from the surprisingly low Rs 22,700 crore in FY25. The Pradhan Mantri Awas Yojana scheme, both rural and urban, sees strong growth of over 50 per cent. There is Rs 20,000 crore allocated for the R&D mission, and spending on new employment generation programmes has surged from Rs 6,800 crore to Rs 20,000 crore. With control on revenue expenditure, the quality of the deficit has also improved, with the revenue deficit dropping by Rs 86,000 crore in absolute terms, from 1.9 per cent to 1.5 per cent of GDP.
On structural reforms, the raising of the foreign direct investment (FDI) limit in insurance to 100 per cent is important, as is the possibility of greater private sector participation in nuclear and revisiting the Civil Liability for Nuclear damage Act, which had prevented investments.
A Rs 1 trillion urban challenge fund to improve urban infrastructure, along with the continued focus on incentivising the states to pursue power distribution reforms, is welcome. Targeted measures for labour-intensive sectors like toys, food processing and footwear were long overdue, and show the focus on low-skilled manufacturing. Expanding capacity of the IIT’s and medical colleges is low-hanging fruit and much needed to handle our demographic bulge.
The focus on tourism is sensible, reflecting attention on creating semi-skilled jobs. The comment on India Post and making it a catalyst for the rural economy is potentially a big reform, contingent on successful implementation. The mission on high-yielding seeds and cotton productivity is also long overdue. Bringing gig workers into government welfare programmes and registering them formally offers a safety net for the over 1 million individuals engaged in this work. A revamped central KYC registry should really improve the ease of business for the financial sector. The promise of expanding the scope of safe harbour rules and predetermining arm’s length pricing for international transactions will provide certainty for international taxation and reduce litigation. There also appears to be a serious attempt to rationalise the tax deducted at source/tax collected at source rules.
All in all, a good Budget. The FM has played her hand well. She has done all that she could to incentivise other drivers of growth beyond government capex, while being fiscally responsible. There are enough structural reforms and ease-of-business measures to satisfy even staunch critics. There is nothing damaging. I believe this is a Budget that meets the need of the hour, and one should have greater confidence in India’s growth outlook.
The writer is with Amansa Capital
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
