Beyond Tax Cuts, A Closer Read of the Union Budget

Context

• The Union Budget 2025-26 presented by the finance minister comes at a time of significant macroeconomic challenges.
• While the Budget lays out an ambitious roadmap for Viksit Bharat (Developed India), encompassing key sectors such as agriculture, manufacturing, MSMEs, social welfare, and infrastructure, its execution remains a critical concern.
• Therefore, it is crucial to examine the fiscal consolidation strategy, tax revisions, manufacturing incentives, agricultural initiatives, external sector policies, and climate commitments outlined in the Budget, highlighting both its strengths and limitations.

A Critical Evaluation of Key Budget Announcements

• Fiscal Consolidation: A Questionable Target
  • A key highlight of the Budget is the fiscal consolidation target of reducing the fiscal deficit to 4.4% of GDP by FY26.
  • However, this ambitious goal relies on overly optimistic revenue projections, including an 11.2% increase in total tax revenues and a 14.4% rise in income tax revenues.
  • Given the economic headwinds, such as declining domestic consumption and weakening external demand, these estimates appear questionable.
  • Additionally, the success of the second asset monetisation plan (2025-30) remains uncertain, considering the underperformance of the previous program.
  • The estimated ₹11.54 lakh crore in net market borrowings further raises concerns about potential crowding out of private investment at a time when credit demand is already subdued.
  • Achieving these revenue targets will require improved tax collection efficiency, realistic monetization strategies, and disciplined fiscal management.
• Tax Revisions: Boosting Disposable Income but at a Cost
  • The revisions in personal income tax rates under the new tax regime offer relief to middle-income taxpayers, with incomes up to ₹12 lakh effectively exempt from tax.
  • While this measure may enhance disposable income and consumer spending, it comes at a significant cost—₹1 lakh crore in foregone direct tax revenue.
  • This loss could constrain the government’s ability to fund critical development initiatives, particularly when public investment in infrastructure and social welfare remains vital.
  • Moreover, the tax cuts come at a time when household savings have declined to 18.4% of GDP, raising concerns about their long-term sustainability.
  • The challenge lies in balancing immediate fiscal stimulus with the need for long-term economic resilience.
• Manufacturing Sector: Progress, but Gaps Remain
  • The Budget reaffirms India’s ambition to become a global manufacturing hub, but concerns persist regarding the sector's underperformance, which contributes only 17% of GDP.
  • While production-linked incentives (PLIs) have had moderate success in certain industries like electronics, their scalability and effectiveness remain uncertain.
  • Positive measures such as enhanced credit facilities for MSMEs, a National Manufacturing Mission, and revised MSME classification criteria may improve business efficiency.
  • However, deeper structural issues, such as regulatory inefficiencies, infrastructure deficits, and weak innovation capacity, remain unaddressed.
  • India’s industrial R&D investment stands at a mere 0.64% of GDP, significantly lagging behind innovation-driven economies like China and Germany.
  • Without sustained investment in research, infrastructure, and regulatory reforms, India's manufacturing ambitions may fall short of expectations.

Some Other Key Themes of the Budget and Remaining Gaps

• Agriculture: A Strategic Shift but Missed Opportunities
  • Recognising agriculture as a key economic pillar, the Budget introduces initiatives such as the Prime Minister Dhan-Dhaanya Krishi Yojana and the National Mission on High-Yielding Seeds to enhance productivity and climate resilience.
  • The increase in Kisan Credit Card (KCC) loan limits from ₹3 lakh to ₹5 lakh and targeted interventions in low-productivity districts signal a move towards precision support rather than blanket subsidies.
  • However, these measures do not fully address systemic inefficiencies in agricultural markets.
  • The focus on short-term credit enhancements perpetuates farmers’ dependence on loans without tackling issues like price volatility and market access.
  • Additionally, the Budget misses an opportunity to promote agricultural exports, particularly in emerging sectors like millets and organic farming, which could have positioned India as a global leader.
• External Sector: Inadequate Response to Global Challenges
  • India’s external sector policies receive limited attention in the Budget despite growing trade deficits and currency depreciation challenges.
  • While services exports, particularly in IT and business process outsourcing, continue to perform well, efforts to diversify the export portfolio remain insufficient.
  • Initiatives like Bharat Trade Net (BTN) and export credit support for MSMEs are positive steps but lack the scale necessary to address India’s persistent trade imbalances.
  • Moreover, the Budget fails to introduce a comprehensive export strategy for high-value sectors such as pharmaceuticals, renewable energy, and advanced electronics, which are crucial for integrating India into global supply chains.
  • A more aggressive push in these areas could have enhanced export competitiveness and strengthened India's economic resilience.
• Climate Commitments: Incremental Rather Than Transformative
  • While the Budget signals intent on climate action, its financial commitments remain cautious.
  • Key measures include incentives for lithium-ion battery recycling, duty exemptions on critical minerals, and support for domestic solar and battery manufacturing.
  • These steps aim to reduce import dependence and strengthen supply-chain resilience.
  • However, without parallel investments in grid modernisation, energy storage, and industrial decarbonisation, India's transition to a low-carbon economy will remain fragmented.
  • A more transformative push, such as higher budgetary allocations for renewable infrastructure and carbon capture technologies, would have accelerated progress towards sustainable growth.

Conclusion

• The Union Budget presents a vision for economic growth, fiscal discipline, and structural reforms but falls short in execution strategies.
• While measures such as tax cuts, MSME support, agricultural reforms, and climate initiatives reflect positive intent, concerns remain over their sustainability and effectiveness.
• The fiscal consolidation target appears ambitious, and the reliance on optimistic revenue projections raises questions about its feasibility.
• Ultimately, the success of this Budget will depend on the government's ability to implement its policies effectively while maintaining economic stability.

Q1.  What is the key fiscal consolidation target in the 2024 Union Budget?
Ans. Reducing the fiscal deficit to 4.4% of GDP by FY26.

Q2. How do the new tax revisions impact middle-income taxpayers?
Ans. They reduce tax liabilities, exempting incomes up to ₹12 lakh, but lead to ₹1 lakh crore in foregone revenue.

Q3. What are the major concerns regarding the manufacturing sector reforms?
Ans. Regulatory inefficiencies, infrastructure gaps, and low industrial R&D investment.

Q4. Why do the agricultural initiatives fall short despite targeted reforms?
Ans. They focus on short-term credit without addressing price volatility and market access.

Q5. What is the main limitation of the Budget’s climate action measures?
Ans. A cautious, incremental approach without significant investment in grid modernisation and industrial decarbonisation. 

Source:The Hindu