In presenting the Union Budget for 2025-26, finance minister Nirmala Sitharaman would seem to have managed the envious task of giving out generously to the taxpayer while remaining fiscally responsible and prudent.
How has she managed to do this?
The short answer is that it has been achieved partly through curbing ambition in spending to create assets for the future and partly by assuming that personal incomes, especially at the upper end of the income spectrum, will grow quite handsomely in the coming year.
The Centre’s own capital expenditure for 2025-26 has been budgeted at Rs 11.2 lakh crore, barely 0.9% higher than in the Budget for 2024-25 in nominal terms. Accounting for inflation, it effectively means govt plans to invest less in asset creation than it did a year ago. Even adding the grants in aid provided by the Centre for creation of capital assets, the “effective capital expenditure” is slated to rise by just about 3% from a little over Rs 15 lakh crore to a tad under Rs 15.5 lakh crore.
On the receipts side, the Budget assumes that revenues from personal income tax will grow by a healthy 14.4% from a little under Rs 12.6 lakh crore in the revised estimates for 2024-25 to Rs 14.4 lakh crore in the coming year. Considering that she has given away Rs 1 lakh crore through changes made in tax rates and rebates, that might be considered optimistic by many.
The assumption of growth in income tax collections, interestingly, does not find reflection in the projected figures for GST or for corporate income tax, both of which are projected to go up by just over 10%. These are in line with the 10.1% growth in GDP the Budget assumes for the coming fiscal year.
The Budget also assumes a healthy growth in the Centre’s revenue from dividends and profits of the public sector from Rs 2.9 lakh crore to Rs 3.3 lakh crore between RE 2024-25 and BE 2025-26.
The combined effect of the modest growth in capex and the assumed high growth in income tax revenues is that it has made it possible for the fiscal deficit for 2025-26 to be pegged at 4.4% of GDP, down from the 4.8% in the revised estimates for the current year. In absolute terms, the deficit is pegged to remain stagnant at about Rs 15.7 lakh crore, which means that the higher GDP base will reduce it as a percentage.
The revenue deficit, or the difference between revenue receipts and revenue expenditure – considered by economists to be an even more worrying figure than the fiscal deficit – has also been contained in the budget estimates at 1.5% of GDP or Rs 5.2 lakh crore, down from Rs 6.1 lakh crore in the RE for the current year.
If the assumptions on buoyant personal income tax collections prove overly optimistic, govt may well be forced to face the choice of pruning the modest capex goals even further or letting the deficit balloon beyond the target.
