Nirmala Sitharaman’s 8th consecutive Budget – a record – bets on a consumption expenditure boost from tax giveaways, the largest ever in absolute terms, and yet banks on a big jump in income tax revenue to lower the fiscal deficit. The Budget was clearly a response to the govt sensing middle class angst. The FM mentioned the middle class at the very beginning of her speech and kept the news of tax cuts till the very end.
It came against the backdrop of a slowing economy and sluggish consumption growth, especially in urban India.If cutting taxes to boost consumer spending is the FM’s short-term response, proposals to review and reduce regulations, decriminalise 100 provisions in various laws, and introduce a simplified income tax bill are her longer-term strategies for the economy.
On the investment side, aside from hiking insurance FDI limit to 100% from 74%, she promised easier entry for foreign investors in this sector. She also committed to a revamp of bilateral investment treaties to make them more “investor friendly”. India’s BIT has been a sore point with several countries from Australia to Saudi Arabia and UK.
With only a marginal increase in govt’s budgeted capex for 2025-26, GOI officials say that it’s time for the private sector to increase its capex.
Golden giveaway & lower fiscal deficit: How FM managed both
For domestic manufacturers, she announced a sharp increase in classification norms (turnover and investment) for MSMEs – allowing smaller firms to scale up and still retain existing benefits such as easier credit access.
But how did the FM manage to pare down fiscal deficit while announcing the biggest tax giveaway ever? First, by pretty much keeping govt capital expenditure at 2024-25’s budgeted levels, and second, by assuming a big jump in income tax revenue growth.
Hence, the improved fiscal deficit/GDP ratio of 4.4% for 2025-26, down from 4.9% budgeted for 2024-25. In revised estimates, fiscal deficit for the current year is marginally lower at 4.8%.
Govt’s effective capex (what GOI spends plus what it gives to states for capex) was budgeted at Rs 15 lakh crore for 2024-25. For 2025-26, it goes up to Rs 15.5 lakh crore. In nominal terms, that’s a modest increase of around 3%. But what counts is the increase in real terms – the rate of change adjusted for inflation rate. Since inflation will almost certainly be higher than 3%, govt capex will likely shrink in real terms between this fiscal year and the next.
Plus, GOI isn’t even spending what it’s budgeting for capex – in the current year, actual capex is less than the budgeted amount. Pundits argue that in the next fiscal year, govt capex is also likely to be lower than the budgeted amount.
The FM’s other budget strategy is betting on high income tax revenue growth. The Budget assumes a 14.4% jump in revenue from personal income tax, despite a Rs 1 lakh crore giveaway, and despite about one crore people going out of income taxpayers’ net. In contrast, for corporate tax, where there’s no giveaway, the growth in revenue is assumed to be 10.4%. And for GST, which is outside the scope of the Budget, revenue growth is assumed to be 10.9%.
She will get some help from a possible Rs 2.6 lakh crore dividend from RBI. Still, the big question for the finance minister’s Budget maths is this: how will I-T collections go up sharply when fewer people will be paying tax and those still in the taxpayers’ category will be paying less?
That will only happen if incomes of taxpayers go up appreciably next fiscal – the pre-Budget Economic Survey nudges India Inc to hike wages on the back of 15-year-high profits. But given the expected growth slowdown amid widely predicted geopolitical and geoeconomic tensions, that looks like a tough ask.
