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The Union Budget 2025-26 is possibly one of the most interesting and the most populist ones presented in recent times. The Indian economy is the best-performing economy among all the major economies of the world in terms of growth numbers despite a lower-than-expected growth of 6.3 percent as projected for 2024-25. While realising that, the Economic Survey 2024-25 further acknowledged that some of the important indicators of macroeconomic health are indeed in good shape. Therefore, the time seems opportune to bring some big-bang change in development thinking and address some of the loose ends that may have come in the way of short-term growth and can be an impediment to the long-term vision of Viksit Bharat 2047. To do so, some important steps have been taken to address the short-term concerns, and a few malaises that have plagued the Indian economy for a long time. That does not mean that the Budget does not have its misses. Let me take them up one by one.
The Indian economy is the best-performing economy among all the major economies of the world in terms of growth numbers despite a lower-than-expected growth of 6.3 percent as projected for 2024-25.
The first positive aspect of the Budget lies with the much-touted relief offered in personal income taxes. By making the annual income up to INR 12 lakh free of income tax, and revising the slab for the highest tax rate of 30 percent to over INR 24 lakhs from Rs 15 lakhs annually, higher cash inflow in the hands of households gets ensured. As the FM’s Budget speech states, “… A tax payer in the new regime with an income of Rs 12 lakh will get a benefit of Rs. 80,000 in tax …. A person having income (sic.) of Rs18 lakh will get a benefit of Rs. 70,000 in tax … A person with an income of Rs. 25 lakh gets a benefit of Rs. 1,10,000”. This extra money in the hands of the common man, households and the citizenry is prone to trigger the most critical driver of economic growth of the Indian economy, private consumption. While India’s growth over the last three decades has been driven by consumption, as can be made from the fact that there has been a co-movement of consumption growth and GDP growth, the correlation snapped during the last FY24, and also the first two quarters of FY 25, with revival occurring during Q3 of FY25. This revival needs further boosting, and the personal income tax proposals in the Union Budget 2025 attempt to do exactly that. Further, this will spur the consumption multiplier through the increase in disposable incomes (i.e. income with taxes deducted). Given that the marginal propensity to consume (i.e. increase in consumption with a rupee increase in disposable income levels) of the lower and middle-income groups is substantially higher than the higher-income groups as ORF’s unpublished estimates suggest, the relief to the middle class will drive growth through a high consumption multiplier effect.
The second growth driver is the growth in capital expenditure. While it may seem that there is barely a 0.9 percent increase in the budgetary allocation from 2024-25, the increase from the actual capital expenditure in 2024-25 to the budgetary allocation in 2025-26 is more than 10%. Rather, if “Grants in Aid for creation of Capital Assets” is added to this allocation, the effective capital expenditure in the budgetary allocation will grow by more than 17 percent from 2024-25. While discussing the Economic Survey 2024-25, I emphasised the importance of capital expenditure for the Indian economy by quoting the numbers that underscore the superior efficacy of capital expenditure. Its multiplier effect, approximating 2, significantly outpaces that of revenue expenditure, which lingers at a modest 0.9. During the first quarter of FY25, capital expenditure temporarily took a backseat due to the general elections. However, post-July, it witnessed a robust resurgence, even as non-debt receipts faced a contraction—primarily attributable to an uptick in tax devolution to states. This suggests that the government has adeptly navigated the conventional trade-off between fiscal prudence and capital investment, ensuring that growth imperatives remain uncompromised.
Ship-building endeavours and the creation of the Maritime Development Fund are commendable steps, but the Budget should have also considered the coastal economy here, where a host of economic activities can take place.
The third growth driver that this Budget mentions is in the form of the Blue Economy. But, possibly more opportunities could have been leveraged there. Under agriculture, it has talked about only marine fisheries, but taking advantage of the massive potential of blue economic activities including tourism, agriculture-industry linkage, shipping industry, coastal and marine ecosystem services, nature-based climate solutions linking land-holders to carbon markets, etc. would have helped the cause of the macroeconomy as a whole. Of course, ship-building endeavours and the creation of the Maritime Development Fund are commendable steps, but the Budget should have also considered the coastal economy here, where a host of economic activities can take place. There is an utmost need for economic valuations of non-marketed contributions of the blue economy to make its potential realised. Global estimates suggest that the blue economy is valued at US $24 trillion, while no such estimates exist for India.
In the broader sectoral context, the Budget has made extensive announcements for agriculture. Traditionally the slowest growing sector of the economy that is claimed to be the economy’s largest employer, the sector is also a reflection of deep, long-drawn malaise plaguing the economy so far. The sector has the lowest average labour productivity among all other sectors contributing approximately 16 percent of India’s GDP for FY24 (PE) at current prices by employing 46.1 percent of the population, according to the Economic Survey 2024-25. In its present state, scientific innovations and skilling cannot transform this sector into a growth driver. The real challenge lies in deciphering, understanding, rationalising and regulating India’s domestic agricultural supply chain. The cyclical food price inflationary trend, driven by market cornering and speculative activities in commodities like onions, has long plagued the sector, harming the end consumer. On the other side, small and marginal farmers have been bereft of remunerative prices due to a lack of market linkages. Despite repeated attempts, physical market regulation has largely failed to curb these distortions. The issue is neither novel nor transient but reflects a deep-seated structural inefficiency in India’s agricultural markets, necessitating more effective regulatory and policy interventions. The Budget, while talking about non-monetary regulators, should have mentioned the constitution of a strong, autonomous physical market regulator to curb these structural inefficiencies in the agricultural sector.
The cyclical food price inflationary trend, driven by market cornering and speculative activities in commodities like onions, has long plagued the sector, harming the end consumer.
The fourth positive growth driver in the long run is human capital. This is where the Budget scores. There have been extensive announcements for education and skilling, and on health as well. India is a labour-endowed economy and boasts of its youth capital. However, such a demographic dividend needs to be exploited through skilling to meet the needs of the Industrial Revolution 4.0. This is where new skills need to be acquired. The alleged employment problem is not from the perspective of job creation—a growing economy always creates jobs, as has been evidenced by the fact that between 2016-17 and 2022-23, new jobs of 170 million in absolute numbers have been created. Therefore, the problem lies with skilling mismatch and not number mismatch. The new initiatives in the Union Budget to convert the labour pool to productive human capital (National Centres of Excellence for Skilling, Centre of Excellence in AI for Education, expanding capacities of the IITs, etc.) through skilling and better health facilities have many advantages if the trend continues in the future. First, it can create a productive labour pool for the domestic economy, and enhance labour productivity. Second, it will help the cause of consumption-driven growth through better wages. Third, India can create a case for human capital migration to labour-deficit advanced economies which can benefit in the process, and the domestic economy also benefits through repatriation.
The fifth driver of growth has been envisaged as the MSMEs, for which a host of schemes have been proposed. While MSMEs constitute 45 percent of Indian exports, the challenge also lies in making them competitive to fit into the global value chain. The Indian MSME contribution to the GVC in manufactured products is negligible, to say the least, and therefore, to what extent the schemes proposed schemes can help in that direction remains to be seen.
While MSMEs constitute 45 percent of Indian exports, the challenge also lies in making them competitive to fit into the global value chain.
However, one big miss in the Budget is a complete disregard for climate adaptation financing though the Economic Survey 2024-25 emphasised that. This is a surprise as allocation for the renewable energy ministry has increased substantially thereby highlighting the government’s intention towards green energy transition.
From a fiscal discipline perspective, this Budget talked of bringing down the fiscal deficit to 4.4 percent from the revised estimate of 4.8 percent for FY25. The imminent challenge is how the government will manage the situation when the recommendations of the 8th Pay Commission are implemented in January 2026, resulting in outflows through revenue expenditures.
In any case, for the time being, this Budget is a successful endeavour in circumventing the trade-off between fiscal prudence, promoting growth, and attempting to promote distributive justice. This will have its bearing on the long-term vision of Viksit Bharat 2047.
Nilanjan Ghosh leads the Centre for New Economic Diplomacy (CNED) and the Kolkata Centre at the Observer Research Foundation.
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