By T N Ashok
In 2025-26 budget some strategic steps have been taken to stimulate India’s business environment including reforms to remove bottlenecks in key business areas, reducing minimum capital requirement, and simplifying the process of obtaining necessary licenses. But the focus of this eight budget presented by the finance minister Nirmala Sitharaman was on boosting consumption by giving big relief to the income tax payers totalling Rs. one lakh crore.
The finance ministry mandarins understood found that incentives to manufacturers is not enough to spur growth , it had to be matched by an incentive to spend, and the only way to do that was put more money in the hands of the people , the middle classes which is the backbone of any economy in the world. Hence came the huge tax breaks, the economic reality versus the political reality that said it was timed before the Delhi assembly elections results to woo the government employees both central and state and middle classes which have voted AAP three times.
The tax exemption will help bring out consumers to take out their wallets to spend, especially with the phenomenal growth of mobile applications and online shopping platforms such as Amazon, Snapdeal, Walmart, and Flipkart. The sudden surge to spend would lead to a slight kicking up of inflation, but that’s moderate and can be controlled by rate increases, the repo rate that RBI enforces on commercial banks. And commercial banks can up the rate of lending to borrowers in personal, automobiles, housing loans. But that’s not going to happen, as it will refrain customers from borrowing. The federal bank will keep the interest rates steady so that commercial banks can lend at easy rates and also maintain the statutory liquidity ratio.
Let’s look at the economic scenario that has gone behind the budget making. The economic recovery India made post pandemic shocks and post demonetization seemed to have lost steam because of the wars in Ukraine and Middle East. Consumer spending became very weak in tier one and tier two cities that help the manufacturing sector due to anemic growth of labour incomes, joblessness and unemployment, but incomes were still high at the top of the economic or salary pyramid, top executives and industrialists continued to make m0nies at the cost of the middle classes and the larger population.
Corporates were sitting on a huge pile of cash with their profits soaring sky high, but they were not willing to invest in new capacities unless they saw robustness from consumers who were resistant to spending. The new tax cuts will leave one crore middle class people with a cash on hand .This works out to about 0.3% of India’s overall GDP. The huge tax cuts are meant to spur spending by the middle classes, hitherto resistant, and hopefully stimulate wider economic activity.
Interestingly, personal income tax revenues contribute to government revenues much more than corporate taxes. This was not the economic scenario before the pandemic. Due to government efforts to increase the tax net and getting more people to pay income tax, even the small shopkeeper, tax buoyancy has gone up considerably. Finance ministry figures show that Rs 22 out of every Rs 100 in tax revenues majorly comes from the middle classes. And only 17% comes from the corporate sector and high net worth individuals.
There is a second major shift is of considerable significance. If you have read the statement of the FM in 2021, she announced a plan to gradually bring down the fiscal deficit. What is the fiscal deficit, the word has foxed many people. It simply means the difference between the government’s earnings from taxes and borrowings from institutions and government expenditure, if the government’s spend on public welfare programs outpaces its revenues, mainly garnered through taxes, then fiscal deficit is high, which is not good for the economy.
The government would have to trim its expenditure. This is a tough task for any government as reducing public debt incurred on social welfare programs through government borrowings and the associated interest payments on debt requires extraordinary skill without raising taxes, interest rates, or making life difficult for the people. Also, the vote banks come into the picture. It’s a tight rope walk.
The idea for the government was to mend public finances without disrupting economic recovery through an overtly dramatic fiscal contraction. Got it. The Modi government has largely and credibly fulfilled its objective and promise. Fiscal deficit is expected to contract to 4.4% of the GDP by FY 2025-26, which is healthy for the economy. The new thrust and strategy of the finance ministry will be to put the ratio of public debt to GDP on a lower growth trajectory, a downward decline so to speak.
But this is a fiscal framework as yet untested in India, warn economists. Economists say that the new strategy will give the government, especially finance ministry mandarins, a greater flexibility to manage the country’s overall economy than being chained to a single fixed economic budgetary number.
Fiscal deficit is more precisely defined as the difference between government’s borrowings with associated interest payments on it, which is an outgo of payments, against the revenues it raises through taxes. Borrowing is public debt incurred for welfare programs. To name a few concessions to farmers, power subsidies, fertilizer subsidies, cooking gas subsidies, are the bulk of the government’s debt.
The union budget is always based on tenable numbers, an economist says adding, that the government’s estimates of tax revenues are open to debate as it depends on how people anticipate the trajectory of economic growth. Income tax collections are expected to rise to Rs 1.81 trillion or $10 billion, despite relief given to taxpayers in the middle classes. Government expects tax revenues to grow faster in nominal terms than the underlying economy. The only way to tackle this is either wage earners’ incomes rise substantially, meaning the government increases the pay scales of its employees and the corporate sector gives out hefty pay increases to its workforce, or more people are brought into the tax net.
It’s easier to bring more people into the tax net than effect a wage increase deftly which in turn would lead to inflationary growth. The paanwalas, beediwalas and the kirana stores hardly pay any income tax, there is a huge potential here.
The Modi government has been very conservative in its fiscal approach unlike the USA by keeping public expenditure on a tight leash, therefore incurring lesser public debt and associated interest payouts, , so that public expenditure does not outpace its revenue earning capacities. Modi thus gave the finance minister. Ms. Nirmala Sitharaman and her finance ministry mandarins a carte blanche to increase consumer spend through sustained tax breaks over eight years and also keeping a tight leash on public spend on welfare programmes. So that fiscal deficit was under check and the economy became vibrant , but the issue of joblessness and unemployment haunts the government as unless this is tackled, tax breaks percolate only to government staff and not the private sector riddled with unemployment.
It’s interesting to note that despite the initial euphoria over FM Sitharaman’s 8th budget in a row and huge tax breaks, anticipation that people would invest in stocks and scrips, the markets slided a day after — the sensex fell 319 points , or 0.41% to 77,186,74while Nifty 50 fell 121.10 points or 0.52% to 23,361.05. Though portfolio investments are not the true indicator of a country’s economy, but more importantly the FDI (Foreign Direct Investment) , it does constitute an important fraction of the foreign exchange reserves. So flight from the markets affects the Rupee Dollar parity. People like George Soros, the US financial buccaneer, who invest heavily in stock markets globally keep shifting from market to market to make the fast dollar.
US President Trump’s announcement of 25% tariffs on Canada, Mexico and 10% over existing tariffs on China snowballed over the markets globally. India was no exception. The Indian rupee sharply devalued against the dollar in the wake of the announcement in the money markets. A broker at Angel one said that Asian markets were under tremendous pressure, though there was an initial dip, there was no substantial selling later.
Rupee weakens further to Rs 87 to a dollar. For the first the lowest parity as Trump’s aggressive tariff policy triggered a rally for the dollar globally. The dollar index surged 109.39 showing a strong risk aversion and capital flight towards the US. Now that led to a sharp decline in the Indian rupee.
While Trump’s tariffs may bring in the desired effect in US global trading of short term boost in its fiscal position, in the long term it’s going to trigger inflation which most countries of the world including India are trying hard to control in the wake of supply disruptions caused by the Ukraine and Middle east wars. Trump’s desire for lower interest rates may be dented because inflation would have to be controlled by Fed’s rate hikes that would make the cost of borrowing go up and the Indian diaspora would be faced with higher mortgage rates in the housing market which had just begun to revive. Indians are the major new house buyers and 2d house buyers in the US mortgage business in real estate.
Ms Sitharaman’s budget though overall presents a rosy picture through tax breaks but lacks specific measures to boost infrastructure spend and incentives to PSUs particularly in the power and oil and gas sector that need a stimulus. Investor sentiments were hit by lack of such measures in the budget. Consequently capital goods and PSU stocks took a nosedive. Traders are holding back investments waiting to see if the Reserve Bank’s monetary policy committee announces rate cuts or keeps it steady with an impact on borrowings and investments and the Delhi assembly results. (IPA Service)
Why Modi’s Gamble In 2025-26 Budget On Mega Tax Relief Will Fail? 