Sanjeev Ahluwalia | Budget Can Do Groundwork for Deep Reforms in India

There is no fiscal space for meaningful change in the pattern of Union Budget allocations. Our national income base is tiny for a population of 1.4 billion. Even a high nominal growth of 12 per cent pushes GDP to Rs 400 trillion in 2026-27 but gives just Rs 22,000 per person in tax resources, at a tax to GDP share of 8 per cent for the Union government.

Non-tax revenue is a low 1.6 per cent of GDP and adds only Rs 4,000 per person because public asset monetisation has stalled. Public debt levels need downsizing towards the normative 80 per cent of GDP.

Partly this is because the BJP -- even in “double engine” states where it is politically dominant -- lacks a diversified voter base. Because its political margin is thin, it hesitates to displease core voters. Agriculture (about 15 per cent of Gross Value Added) remains out of the tax net, as is land or built-up property in rural areas. One-half of even urban entities do not collect property tax, and those that do, apply historical low rates. Ditto for several other public utilities like water, electricity or urban bus transit for women.

Hyderabad is the exception, with a data-driven, GIS-anchored, property tax collection model and revenues growing in double digits. The administrative effort required by state governments -- under whose remit property tax lies -- is significant, but the rewards match. Doubling the volume of property tax collected would generate an additional Rs 1 trillion, or 0.35 percentage points of GDP. Small beans by national standards but equal to one-third of the annual state government expenditure on urban development, freeing up fiscal space for allocations to health, education and social support programmes.

Fiscally independent state governments and urban bodies and a stricter division of work domains versus the Union government could focus the latter on its core areas -- defence, space, networked infrastructure resilience, PPP in R&D, energy transition and external economic integration to bolster strategic partnerships -- subjects more closely aligned with its constitutional remit.

The Union government does too much for social protection and too little for infrastructure, science and technology and security. Having social welfare off completely to state governments and local governments would help. The Congress earlier and now the BJP are both highly centralised political parties, with Delhi calling the shots. Mimicking state and municipal government social support programmes is believed to shore up mass support for the ruling party at the Centre.

Since the late 1960s, Union governments have competed with state governments for branding as the benefactors of rural areas and the poor. Clunky, state-managed cereal procurement has since morphed into an expensive and inefficient minimum price assurance scheme for farmers.

At the retail end, a free cereal supply scheme benefits about 850 million people (out of 1,450 million). Other Union government schemes offer cash support to 110 million rural families.

De-risked agricultural production, via Union government- supported public and private insurers, covers one-third of the cropped area. Union government-led agricultural reform stalled in 2021. It is unlikely that over the second half of the present Narendra Modi administration -- with frequent Assembly elections -- this conundrum can be resolved.

Incentivising states to explore alternative, locally responsive measures for social protection can provide rich dividends. Some states, like Madhya Pradesh, had innovated and offered only the difference between the market price and a notional administered price to farmers for food procurement. The real efficiency punch is ending government procurement and retail supply and instead transferring a cash grant in Central Bank Digital Currency to beneficiary accounts. Beneficiaries, even in remote village,s will continue to remain beholden to the Union government -- like Indians were beholden to Americans in the 1960s under PL-480, when wheat was shipped to India as food aid. The efficiency gains from government disintermediation can be added to the amounts paid to beneficiaries.

Coupled with social support extravagance is the fact that India skates on thin ice, without deep fiscal buffers to deal with any exigencies and disasters. The Covid-19 pandemic was one such rude shock. We can hardly anticipate when or from where the next shock will come. As global uncertainty increases, we must tread with caution. Preserving fiscal stability remains key. India is too big to be bailed out when the world itself is stressed.

The BJP government, ever since 2014, has credibly focused on living within its means. It pursued reduction of the fiscal deficit from a high of 6.5 per cent in 2009-10 and took it to 3.5 per cent of GDP in 2016-17. The Covid bulge to 9.2 per cent in 2021 has since been reduced to 4.4 per cent in 2025-26 with a glide path to the normative 4 per cent. It is essential to rein in state government fiscal deficits too within the normative 3 per cent.

Public debt at 81 per cent (IMF 2024) is not menacing because the external debt is low. Nevertheless, belt-tightening in public expenditure, not directly feeding into growth, is necessary to leave safety margins for emergency financing. Significantly enhancing the efficiency of public spending is essential. The reduction in logistics cost from double digits earlier to 7.9 per cent of GDP in 2024 (NCAER) reassures that capital spend has helped. Widening the scope and deepening the metrics in the

performance budget framework, including for state governments, can improve the efficiency of expenditure and generate medium-term perspectives just by measuring the outcomes better.

The task before the finance minister is to harmonise conflicting

objectives. First, walk the tightrope to continued fiscal stability despite pressing demands for public investment in green transition and economic growth. Second, direct and indirect tax policy has gone through meaningful change since 2019 and a “quiet” period for the next two years would be welcome, especially since inflation levels are low.

Third, tax policy reform could shift to integrating excise tax on alcohol and petroleum fuels into the GST framework, whilst assuring states against loss of revenue. Fourth, incentivise the collection of property tax.

Fifth, initiate a funded transfer of social support initiatives to state governments via a Social Support Council on the GST pattern. Enabling state participation in decision-making could bring cooperative federalism to fruition. Reverting to the financing mode of the erstwhile MGNREGA for the new “VB G Ram G” scheme would be a welcome “sweetener”, demonstrating good faith versus states. Naming the new SSC after Mahatma Gandhi would be another.

The writer is a Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank