A Union Budget that Ticks Most of the Boxes
02-02-2025
03:41 PM

Context
- The Union Budget for FY26 has been presented against a backdrop of both domestic and global economic challenges.
- While India’s economy is currently experiencing a cyclical slowdown, marked by weakening urban consumption, slow job growth, and an investment cycle that is yet to become broad-based, the country’s macroeconomic fundamentals remain strong.
- With geopolitical uncertainty and global trade disruptions looming, the government has taken a pragmatic approach to fiscal management, aiming to sustain economic stability while fostering growth.
- Therefore, it is important to explore the key themes of the budget, including fiscal discipline, personal taxation reforms, capital expenditure (capex) allocations, and structural measures for long-term economic resilience.
The Primary Focus of Union Budget 2025-26: Macroeconomic Stability Amidst Global Challenges
- The second half of FY25 is expected to witness a rebound in Gross Value Added (GVA) growth, core inflation remains benign, and the current account deficit is under control due to strong services exports.
- Unlike many other economies, particularly in Europe and Latin America, India benefits from relative political and economic stability, which bolsters investor confidence.
- Recognising the importance of macroeconomic stability, the finance minister has prioritised fiscal prudence.
- A key highlight of the budget is the reduction in the fiscal deficit target, from 4.8% of GDP in the current year to 4.4% in FY26.
- This move signals the unwinding of the post-pandemic fiscal stimulus, preserving policy space for future needs.
- Additionally, the government has maintained a tight rein on the revenue deficit, projected at 1.9% and 1.5% of GDP for FY25 and FY26, respectively, both lower than pre-pandemic levels.
- This has been achieved through improved revenue receipts and controlled discretionary spending.
- By containing inflationary pressures and reducing fiscal vulnerabilities, India strengthens its case for a potential sovereign credit rating upgrade, which would enhance investor confidence.
Personal Income Tax Reforms and Their Implications
- Boosting Disposable Income and Consumption
- By reducing the personal income tax burden, the government is putting more money in the hands of middle-class and salaried individuals.
- This increase in disposable income is expected to translate into higher spending on goods and services, thereby stimulating demand across various sectors.
- In particular, sectors such as retail, consumer durables, automobiles, and discretionary services (such as travel, entertainment, and hospitality) could see a positive impact.
- Encouraging Investments in Real Estate
- Beyond direct consumption benefits, the budget introduces a significant tax incentive related to housing.
- The enhancement of tax benefits for self-occupied properties, allowing individuals to claim tax benefits on two houses instead of just one, is expected to stimulate the real estate sector.
- Real estate is a highly influential sector in the Indian economy due to its extensive backward and forward linkages.
- Increased investment in housing leads to higher demand for construction materials such as cement, steel, and bricks, thereby benefiting allied industries.
- Additionally, real estate development generates employment opportunities for construction workers, engineers, architects, and skilled labourers, leading to broad-based economic gains.
- Potential Risks and Challenges
- While the reduction in personal income tax has clear benefits, it also presents certain risks and challenges.
- One key concern is whether the tax cut will lead to a sustainable increase in consumption or if consumers will opt to save the additional income
- If a significant portion of the tax savings is diverted toward savings rather than spending, the expected stimulus effect on consumption may be weaker than anticipated.
- Additionally, the revenue forgone due to the tax cuts (₹1 trillion) could create fiscal constraints in the future.
- The government has sought to offset this loss by controlling discretionary revenue expenditures.
- However, if economic growth does not accelerate as expected, the lower revenue collection could pose challenges to fiscal management, potentially requiring adjustments in future budgets.
Some Other Key Themes of Budget FY26
- Capital Expenditure and Investment Outlook
- While some market analysts expressed concerns over the perceived reduction in capital expenditure, a closer examination suggests that this is a temporary shift rather than a structural cut.
- The revised capex allocation for FY25 was lowered from 3.4% to 3.1% of GDP, largely due to delays caused by the 2024 general elections.
- However, the government’s disbursement of ₹1.72 trillion in December 2024, the highest-ever monthly capex disbursal, indicates a strong commitment to infrastructure spending.
- For FY26, the capex budget remains steady at 3.1% of GDP, ensuring policy continuity.
- Importantly, the capex-to-revenue expenditure (revex) ratio is set to increase to 28.4%, the highest in over two decades.
- This suggests an emphasis on quality fiscal spending, favouring long-term growth over short-term consumption.
- Sectoral Initiatives and Industrial Growth
- These include the enhancement of classification thresholds for micro, small, and medium enterprises (MSMEs), the creation of national manufacturing and export promotion missions, and the establishment of an investment-friendliness index for states.
- Additionally, labour-intensive sectors such as agriculture, leather, toys, tourism, and hospitality have received targeted policy support.
- By encouraging domestic manufacturing and exports, these measures aim to bolster economic resilience, reduce dependence on imports, and create employment opportunities.
- The focus on ease of doing business and tax simplification is another noteworthy step that could enhance India’s attractiveness for both domestic and foreign investors.
- The Long-Term Fiscal Strategy and Debt Management
- Beyond immediate fiscal measures, the budget hints at a long-term fiscal policy strategy.
- The government plans to transition to a debt-targeting framework from FY27, aiming to reduce central government debt to 49%-51% of GDP by FY31, down from the projected 56.1% in FY26.
- While this approach allows flexibility in fiscal management, it could also introduce volatility in financial markets, depending on the execution and investor perceptions.
The Economic Survey’s influence
- A holistic feature of FY26 Budget lies beyond the numbers it projects.
- Intangible gains could be reaped, which if implemented and executed well, would boost productivity levels in the economy in the longer run.
- A focus on next generation ease of doing business measures, a simplification of the tax architecture (including various decriminalisation measures), and migration towards a light-touch regulatory framework in the non-financial sector are some of the steps that appear to have been influenced by the Economic Survey.
Conclusion
- The Union Budget for FY26 strikes a careful balance between fiscal consolidation and economic support.
- While addressing immediate concerns such as urban consumption and investment sentiment, it also lays the groundwork for long-term economic resilience through prudent fiscal management, strategic capex allocations, and structural reforms.
- However, the effectiveness of these measures will depend on their execution, particularly in sustaining private sector investments and job growth.
Q1. What is the expected impact of the personal income tax reduction in the FY26 Budget?
Ans. It is expected to boost urban consumption by increasing disposable income, stimulating demand in various sectors.
Q2. How does the Budget aim to support the real estate sector?
Ans. By allowing tax benefits on two self-occupied houses instead of one, encouraging housing investment and mortgage lending.
Q3. What fiscal target has the government set for the fiscal deficit in FY26?
Ans. The fiscal deficit target has been lowered to 4.4% of GDP.
Q4. How does the Budget ensure fiscal discipline despite the tax cuts?
Ans. By controlling discretionary revenue expenditure and maintaining a strong capex-to-revenue expenditure ratio.
Q5. What long-term fiscal strategy is the government planning from FY27?
Ans. A debt-targeting framework to reduce central government debt to 49%-51% of GDP by FY31.
Source:The Hindu