Constrained by recent electoral outcomes, the budget deftly manages competing realism and prudence.
Nirmala Sitharaman had her work cut out when, a few weeks ago, she was once again assigned the responsibility of managing the finance portfolio in Narendra Modi’s 3.0 tenure. Her first challenge was to come up with a Union Budget for the remaining eight months of 2024-25, signalling a course correction in light of the less-than-favourable electoral outcome for the ruling party in the general elections. Accommodating the demands of the two consequential regional allies in the coalition government, addressing the emerging discontent among the youth, farmers, and a section of minority voters, along with maintaining the glide path of economic progress in the face of significant global headwinds, were no easy tasks. Deploying her considerable political and professional acumen, she managed to balance the various pulls and pressures without evoking more than the usual level of criticism, which is standard for our large and diverse parliamentary democracy.
In performing her act as an experienced and proficient trapeze artist, the Union Finance Minister was assisted by a few tailwinds, particularly on the much-sought revenue front. Tax receipts in the previous financial year, from both direct and indirect taxes, had been 19.2% and 10.5% higher, respectively, than the year before, and are anticipated to maintain this buoyancy. Alongside this, much higher non-tax revenue, by way of a dividend—a whopping Rs 2.1 trillion from the RBI, the central bank, 141% more than in 2023-24, and Rs 64,000 crore or 28% more than estimated from its PSUs—has been helpful. Another financial bonanza was in its spending. The discounted hydrocarbon imports from Russia had saved its oil marketing companies a decent $10 billion, lowering the government’s subsidy bill on fuel cum fertilizers. The stabilization of international prices of several commodities commonly imported into India helped with inflation management and eased the strain on the exchequer, especially in an election year.
The newly presented budget is based on a similarly optimistic prognosis, including a good monsoon in terms of both adequacy and spread of rainfall. This eases the financial and administrative pressure of mitigating rural distress, effecting higher transfer of funds to states to handle it, and sustaining aggregate demand and consumption in the economy.
Unlike the GDP growth of near 8%, for a variety of reasons, the consumption had been growing at a lower pace. That had highlighted the need for measures to increase the disposable incomes in the hands of those at the bottom in particular since their propensity to consume remains high. A recent fall in the household savings especially at the lower end had corroborated the need for such amelioration in the Budget.
The exercise of fiscal consolidation and maintaining a manageable level of the fiscal deficit in the current financial year—projected to be Rs 16 trillion or 4.9% of GDP, the same as last year’s actual level—becomes more feasible in a benign economic setting. This is demonstrated in the Budget despite the high levels of committed expenditure, particularly in debt servicing, salaries and pensions, ongoing capital projects, defence preparedness, and transfers to the states. The remaining portion, well under 40% of the overall budget expenditure of Rs 48 lakh crores, is all that the Finance Ministry usually has at its disposal to earmark and expend during a year. It is worth recalling that to improve the quality of its spending, the provision for revenue expenditure has been reduced from 15.5% to 11.4% of the overall expenditure. A substantial amount—Rs 11.11 trillion, about 11% more than last year and 3.4% of GDP—has been rightly earmarked for infrastructure-linked capital works.
To maintain a decent rate of GDP growth—projected between 6.5% and 7% (10.5% to 11% in nominal terms)—such elevated government-led capex is certainly warranted, particularly as private sector participation has been tardy (as also indicated in the Economic Survey). Given the prevailing slow rise in consumption expenditure, its impact on capacity utilization, and with the RBI continuing its policy of high primary rates, the private sector players have maintained their wait-and-watch stance.
The expenditure on the development of a new capital city and the completion of a pending irrigation project in Andhra Pradesh, besides new highways and a large thermal power station in Bihar, needs to be viewed from both their high utilitarian value and a political prism. It may be recalled that the Andhra Pradesh Reorganization Act of 2012, a Central enactment, had envisaged a new capital city along with the development of its backward areas with Central financial assistance. Nonetheless, there is a clear case for the government to better address the concerns of private players who, despite having the requisite arrangements for funding, continue to shy away from entering most infrastructure segments. Several of their concerns involve regulatory easing and can be effected outside the Budget. Railways, in particular, needs sizeable private investment to overhaul its heavily used infrastructure, especially the signalling and telecommunications required to maintain passenger safety.
Another major area of expenditure in Budget 2025 is earmarked for rural India. Out of the Rs 2.06 trillion, the outlay for affordable housing has been enhanced to Rs 54,500 crore, compared to Rs 32,000 crore spent last year. Meanwhile, the provisions for MGNREGA, the rural employment guarantee for all registered unemployed adults, and the PM Kisan scheme have been retained at the previous levels, with the annual assistance to the farming community continuing at Rs 6,000 per household.
The allocation for agriculture has been increased marginally by 6% to Rs 1.39 trillion. Most schemes, such as the popularization of natural farming and missions on oilseeds and pulses, were already in place. The fertilizer subsidy amount has been reduced. Among the new initiatives is the reformation of the farm research system to release 109 high-yielding and climate-resilient varieties of 32 crops. Once enthusiastically accepted by farmers, this measure could stabilize agricultural produce and incomes. To ensure that agriculture reaches its potential and migration from rural areas subsides, the government will need to focus more meaningfully on rural areas and agriculture, significantly augmenting financial allocations. In addition to revamping the oilseeds and pulses missions. The facility of Minimum Support Price (MSP) should be extended to vegetables, fruits, and newly grown millets, accompanied by a gradual shift away from staples like wheat and paddy.
Besides the need to give greater attention to rural areas and agriculture, job creation remains a significant challenge. This was acknowledged by the Finance Minister in her Budget speech when she observed, “To leverage its demographic advantage, the nation must quickly augment its capabilities to create jobs.” To address this, she outlined five new schemes to promote education, skilling, and employment, including apprenticeships in organized industry. An overall outlay of Rs 1.48 trillion has been allocated to create 41 million jobs for the youth over the next five years. Another goal of these efforts is to push the youth into formal employment, where job and social security are more assured.
However, both the outlay and the efforts could be considered inadequate and marginal compared to the scale of the challenge especially facing the youth and women seeking employment. A diverse set of initiatives at all levels—by employers, the governments and the private sector—is imperative. The Budget could have been more proactive in this regard after having identified the vulnerable sections and its priorities. The segments of the economy that are amenable to creating greater employment could be identified, and industry-specific incentives offered for each. Reducing the overall capital intensity of Indian manufacturing can be achieved by modernizing and expanding more labour-intensive MSMEs, rather than exclusively focusing on large enterprises. Facilitating small entrepreneurs’ ability to borrow more from financial institutions through tweaking SIDBI’s credit guarantee mechanism, as announced in the Budget, is a step in the right direction.
While maintaining its existing economic growth strategy, which prioritizes businesses and urban areas, the government has undoubtedly made strides toward a more inclusive and comprehensive economy. It has highlighted four key areas of focus—farmers, the poor, youth, and women—and outlined nine priorities to achieve the goal of Viksit Bharat by 2047. Along these lines, a handful of new schemes have been conceived, and outlays provided, but these have largely been incremental adjustments to the previous budgets. Now that the areas of attention stand delineated, during the remaining financial year, all tiers of government will need to flesh out these ideas with detailed operational plans and create a policy framework that genuinely prioritizes each of the identified vulnerable sections in the shortest possible time span.
A group that has secured nearly all it had hoped for are those in the startup sector. The most significant change is the outright abolition of the dreaded angel tax under Section 56(2)(viib) of the IT Act. This move can be seen as the end of their capital scarcity, as startup funding in India is largely through private investors. Alongside this, the Startup India Fund Scheme, initiated in April 2021 for a period of four years, and the Fund of Funds for Startups, launched in 2016 with a corpus of Rs 10,000 crores for investing in startups through alternative investment funds, continue to be viable options to avail of.
The post-pandemic economic recovery has thus far been K-shaped. Official data shows that while consumption inequality has been decreasing, income and wealth inequality have been rising sharply. This pattern is often observed in most capitalist economies unless targeted remedial actions are in place. Despite a reduction in poverty levels, there was a widespread expectation that the Union Budget would more effectively address these disparities.
Although hopes for immediate action have not been fully realized, the government has sought to reform the capital gains tax regime for both short- and long-term gains from equity trading and real estate transactions. It has also doubled the securities transaction tax to discourage futures and options trading, following RBI’s advice, and imposed a tax on promoter-shareholders who offer their equity to other shareholders on a buyback basis. Additionally, by reducing corporate tax rates by 5% for foreign investors, the government aims to counteract the slowdown in FDI and foster competition for domestic investors, many of whom have made substantial profits in recent years.
Dr Ajay Dua, a development economist, is a former Union Secretary, Ministry of Commerce & Industry.