Union Budget 2025 – Enabling Growth While Maintaining Fiscal Prudence

Union Budget 2025-26 has come in context of heightened uncertainty amid economic growth slowing down and protectionism rising across the globe. The external sector worries, reflected in weakening of rupee, constrains monetary policy from supporting domestic concerns such as weakening of growth and liquidity tightness in markets. Slower growth risks undermining India’s ‘Viksit Bharat by 2047’ aspirations, which is coinciding with two decades of favourable demographic opportunity for the nation. The government sees four powerful engines of growth namely, agriculture, micro, small & medium enterprises (MSME), investments and exports.

On agriculture, there is focus on raising productivity, crop intensity and credit availability in 100 districts, benefiting 1.7 crore farmers, through PM Dhan Dhaanya Krishi Yojana, a convergence of existing schemes with additional measures. Interestingly, allocation under PM-Kisan is kept constant, signalling no hike in direct transfer to farmers. Likewise, allocation under crop insurance scheme is reduced, reflecting low adoption among farmers.

The Economic Survey, released a day earlier, identified deregulation as one of the levers to unleash entrepreneurial energy. Bringing economic dynamism especially at ranks of micro, small and medium enterprises, that contribute 45 per cent of exports and employ 7.5 crore, is necessary to absorb un/underemployed labour in primary sector. To usher efficiency through economy of scale, budget proposes to raise investment and turnover criteria by factor of 2.5 and 2 respectively. Credit guarantee cover to MSMEs is also enhanced, to enable credit flow to the sector.

Of late, the household sector had shown lower savings because with wages growing at slow pace, the inflation was eating into their purchasing capacity. This had also begun to reflect in slowing down of consumption; the mainstay of domestic demand.

Long Anticipated Relief

The Budget 2025 thus brings a long anticipated relief for middle and salaried class, by making income up to Rs 12 lakh tax-free after rebate and raising the tax slabs to push 30 percent tax bracket from Rs 15 lakh to Rs 24 lakhs income while easing lower tax slabs. The Finance Minister estimates the revenue foregone of Rs 1 trillion on direct tax measures, which adds to income in hands of households. Further, the Budget has also either enhanced or retained the allocation on key central schemes focusing on welfare of the poor; such as PM Awas Yojana, Jal Jeevan Mission, PM Garib Kalyan Yojana, PM Suryaghar Muft Bijli Yojana and MGNREGA, to mention a few. However, allocation for major subsidies on food, fertilizer and petroleum has witnessed a decline, both in absolute amount and relative share to total expenditure, underscoring a gradual phasing out of post Covid relief.

The Budget 2025 continues its impetus on capex amid fiscal consolidation, which helps with strengthening macrostability. It is evident from the enhanced capex allocation at Rs 11.2 trillion, i.e. 3.1 per cent of GDP, along with enabling measures for private sector investment such as inclusion of large ships and hotels in top 50 tourist destinations in infrastructure harmonised list, partial credit enhancement offering by NaBFID, and PM GatiShakti access to private sector, etc. Setting up a Maritime Development Fund of Rs 20,000 crore along with extending UDAN scheme to 120 new destination is welcome positive for logistics efficiency. Besides, there is extension of 50-year interest free loan of Rs 1.5 trillion loan to state governments for developing infrastructure along with allocation of Rs 10,000 crore under Urban Challenge Fund for providing better urban amenities. States are also incentivised to pursue power sector reforms with relaxed borrowing limit by 0.5 per cent of GSDP. Further, proposal of ministry-wise 3 year pipeline of projects under PPP will give fillip to private sector participation.

Towards export promotion, an inter-ministerial strategy is proposed along with a digital public infrastructure and support for integration with global supply chains. These are imperative as trade protectionism rise across the globe. Proposals on reducing compliance burden for taxpayers are welcome positives for ease of doing business in country.

The fiscal maths is conservative, based on 10.1 per cent growth in nominal GDP, tax buoyancy of 1.07 with fiscal deficit budgeted at 4.4 per cent of GDP (vs 4.8 per cent of GDP in FY25RE), effective revenue deficit at 0.3 per cent of GDP (vs 1.0 per cent of GDP in FY25RE) and net market borrowing at Rs 11.5 trillion, levels similar to current fiscal. With this budget, Government has completed its glide path on fiscal consolidation it set about four year ago, bringing fiscal deficit down from 9.2 per cent of GDP in fiscal year 2020-21. The medium term guidance now pegs target of centre’s public debt on a decline path to around 50 per cent of GDP by fiscal year ended March, 2031 from 57.1 per cent as per revised estimates for fiscal year 2024-25. This accords operational flexibility to finance ministry to respond to emerging macro concerns.

Overall, the Finance Minister has delivered a growth enhancing budget while paving way for lower cost of capital.