Image Source: Getty
A storm of statistics will hit us around 11 am on 1 February 2025, as Finance Minister Nirmala Sitharaman lays Budget 2025 in Parliament, her eighth and the NDA government’s 14th(with two interim budgets in 2019 and 2024, each). Her speech will be an indicator, a beginning of several data adventures that the 14 documents she will lay on the table of the House will carry. How does one read into this Episode 2 of Season 3 being crafted by the third finance minister—after Arun Jaitley and Piyush Goyal— that the third-term government presents?
Budgets—1947 to 2024
Although every Union budget carries similar data, the underlying conditions change every year. Finance Minister R.K. Shanmukham Chetty’s Budget 1947 celebrated freedom. Deputy Prime Minister and Finance Minister Indira Gandhi’s Budget 1969 extended the wealth tax to agriculture. In 1973, Finance Minister Y.B. Chavan’s Budget proposed a personal income tax rate on income more than INR 100,000 to 85 percent, with a 40 percent surcharge taking the total marginal tax to an absurd 119 percent. Finance Minister Manmohan Singh’s Budget 1991 fanned the opening up of the economy by Prime Minister P.V. Narasimha Rao. Finance Minister P. Chidambaram’s Budget 1997 (recorded as a “dream budget”) consolidated the three-slab personal income tax rates to an elegant 10, 20 and 30 percent structure. More recently, Nirmala Sitharaman’s Budget 2023 tripled capital investment in four years and laid the foundations for long-term growth.
In 1973, Finance Minister Y.B. Chavan’s Budget proposed a personal income tax rate on income more than INR 100,000 to 85 percent, with a 40 percent surcharge taking the total marginal tax to an absurd 119 percent.
Challenges for Sitharaman
Budget 2025 comes at a time when the Indian economy faces seven big challenges.
- Slowdown: First, a slowdown in real GDP (gross domestic product) to 5.4 percent for the second quarter of 2024-25, from 8.1 percent in the previous year’s quarter. While this may seem like a minor dip, however, when examined closely, there is a downward trend behind it. Growth has fallen from more than 8.6 percent four quarters ago to the current 5.4 percent. Worse, manufacturing has slowed down to dangerous levels: at 2.2 percent which is way below the 7 percent in the previous quarter and 14.3 percent in the second quarter of 2023-24. In other words, Budget 2025 will have to initiate growth, particularly in manufacturing. If there is no growth visible, the Budget will not be worth the digital space it will occupy. The International Monetary Fund (IMF) projections of a 5 percent growth rate in 2025, the highest in the world, 2 percentage points higher than China’s, and way ahead of the United States (US), the European Union (EU), and West Asia, maybe heartening but inadequate. Budget 2025 will have to articulate a clear path to greater growth.
- Business unusual: Second, the growth of nominal GDP in the first half of 2024-25, at 8.9 percent, presents a mixed bag. The rate needed to achieve Viksit Bharat by 2047, or a US$30 trillion GDP, is 9.6 percent, so it lags a bit. That said, it also shows that inflation is under control. The job of increasing the growth rate, without making it inflationary will be key. Of course, growth rates in democracies carry a natural volatility. India can live with a couple of quarters of low growth, provided the long-term structural reforms, such as those around compliances, are in place. “Business as usual” will not work anymore.
India can live with a couple of quarters of low growth, provided the long-term structural reforms, such as those around compliances, are in place.
- Deficits: Third, as a result of the growth slowdown, Sitharaman must ensure that the fiscal deficit, which has been consistently falling from its high of 9.2 percent in 2020-21 to a budgeted 4.9 percent in 2024-25, continues to reduce. Earlier, growth would have taken care of the deficit as the denominator (GDP) expanded to accommodate expenditure excesses. The size of budgets under the Modi government has grown by 2.8 times over the past decade, a rise of 11.1 percent per annum—that’s faster than Sensex’s 9.9 percent. Growth enabled this rise in public expenditure. Now that growth is slowing down, however, controlling expenditure will take some doing. It is easy to increase costs in good times and impossible to cut them in bad.
- A recent example of wasteful expenditure is the 17 January 2025 INR11,440 crore revival plan for Rashtriya Ispat Nigam Ltd (RINL), a defaulting public sector enterprise with a negative net worth of INR 4,538 crore and one that is unable to get loans from any bank. Questions: why is the government unable to undertake a strategic sale, as it did with Air India in January 2022, and follow through its 1 February 2021 policy of strategic disinvestment? Where is this government’s obsession with doing business headed, and when will it end? Why is the government using good money to finance failed enterprises? And RINL is merely one of several inefficiencies. The processes by which financial efficiencies have been multiplied through the Unified Payments Interface (UPI), for instance, need to be reversed for such failing public sector enterprises, schools without teachers, hospitals without doctors, and governance without accountability. How Sitharaman negotiates this equation between enabling growth and decreasing expenditure, including through strategic sales, will be watched carefully.
The processes by which financial efficiencies have been multiplied through the Unified Payments Interface (UPI), for instance, need to be reversed for such failing public sector enterprises, schools without teachers, hospitals without doctors, and governance without accountability.
- Political economy: Fourth, in an economy that has become a race to the bottom on the freebies front, where legally-binding and therefore mandatory expenditures rise, financial space for nationally crucial expenses such as those on defence and strategic areas become discretionary and get compromised. At a time when India is increasingly becoming and is seen to be one of the guardians of the Indian Ocean Region, this does not bode well from the economic statecraft side. From free electricity and water to free bus rides, and cash for women and the unemployed, promises are easy to make. However, there is a fiscal limit to delivering them. Good politics and good economics are increasingly becoming mutually exclusive. Balancing them at the Union level will be crucial for Budget 2025. The states can follow.
- Tormented taxpayers: Fifth, on the tax justice side, those already being taxed get further squeezed, which creates a constituency of overburdened middle-class taxpayers with no recourse—they are not rich enough to live a dignified life, not poor enough to get doles, not corrupt enough to evade. Their political voice is insignificant, and so they continue to be the load-bearers of politics with more and more taxes such as the tax collected at source. This injustice will continue, as the discussion on expanding the tax base has been assassinated by politics. Map this class’s helplessness and anger against the taxes on the one side, failed public services on the other, unrelenting gouging by new kinds of taxes on the third, and the confidence in the state by those who bear the burden of the state follows the trend of GDP growth—downward.
- No wealth redistribution without wealth creation: Finally, Budget 2025—alongside other line ministries and departments—will need to decide how long wealth redistribution will continue without wealth creation. The current political climate points to a return to the repressive serial regimes of 1947 to 1990 that looked at wealth creators as parasites and harassed them with taxes and rent-seeking. Despite digitalisation and demonetisation, corruption is back. The India Business Corruption Survey 2024 points out that in the past 12 months, 66 percent of businesses surveyed said they had to pay a bribe, 83 percent of which was paid in cash, with 54 percent being forced to do so. The pathway to end the underlying edifice of corruption—excessive and colonial era compliances—has been highlighted in an Observer Research Foundation monograph titled “Jailed for Doing Business”, as have several ideas to sever this umbilical cord between the state and the corrupt. Budget 2025 should take note and nudge relevant ministries to take these forward.
Bribes go to overpaid government officials, whose salaries are expected to jump further with the announcement of the Eighth Pay Commission, even as corruption continues unabated, and efficiencies are sacrificed at the altar of statism. At some point, this will negatively impact Foreign Direct Investment (FDI) inflows, as 83 percent of those surveyed by EY-FICCI (Federation of Indian Chambers of Commerce & Industry) suggests. It will also result in a further increase in millionaires migrating out of India. Forget millionaires, average people are losing confidence—between 2021 and 2023, 605,209 Indians gave up their Indian citizenship and headed to 135 countries including Albania, Belarus, Colombia, Nigeria, and Yemen, apart from the usual destinations in the US and Europe.
It is time for a new deal between wealth creators and taxpayers on the one side and wealth redistributors and rent extractors on the other. Amid these challenges that will be accentuated by the entry of US President Donald J. Trump, who is planning to make doing business in the US easier, and whose impact on the world including India will be adverse, Budget 2025 must plant the seeds of that deal and provide leadership for related ministries to follow.
Gautam Chikermane is Vice President at the Observer Research Foundation.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
PREV
