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Sanjeev Ahluwalia: Budget 2025: A scorecard of FM’s ‘hits’ and ‘misses’

The second target of “inclusive development” -- at least in economic terms -- has been a close favourite of the Narendra Modi government via a range of welfare measures -- universal banking, using the extensive network of public sector banks, digitalisation of payments and communications at competitively determined low charges using private sector smarts, direct transfer of benefits to 180 million farmers and free cereals with a splash of cereals for 800 million people

Finance minister Nirmala Sitharaman crafted her Union Budget 2025-26 around four key targets of accelerating growth, promoting inclusive development, enhancing private investment, uplifting household sentiments including by income-tax reform to enhance income in the pockets of middle-class consumers -- those earning up to Rs 1.2 million a year, who account of over 80 per cent of the total individual income-tax payers.

The biggest step towards accelerating growth was taken by scaling down the fiscal deficit from 4.8 per cent of GDP this year to 4.4 per cent of GDP in 2025-26. Sadly, no further timeline exists for reducing FD to below four per cent – a necessary step to contain inflationary pressure and enhancing the ability to borrow sustainably by creating fiscal reserves to fight future economic disruptions. Instead, there is a bland commitment that FD will be aligned to gradually reduce the Central government’s public debt from about 57 per cent of GDP now (RBI statistics), to below 50 per cent by 2030-31.

The new fiscal target is a debt-to-GDP ratio of 50 per cent -- significantly higher than the 40 per cent of GDP earlier for the Union government, when FD was targeted.

Whether the year-to-year flexibility inherent in the new mechanism will be used productively to keep inflationary pressure at bay while maximizing output, only time will tell. It is, however, reassuring that the focus on enhancing investment outlays continues, with the revenue deficit targeted to decline from 2.6 per cent this fiscal to 1.8 per cent of GDP next year. Consistency across expenditure, tax receipts after the Rs 1 trillion bonanza in income-tax and targeted FD should have been explained better to enhance credibility of the rosy Budget projections.

The second target of “inclusive development” -- at least in economic terms -- has been a close favourite of the Narendra Modi government via a range of welfare measures -- universal banking, using the extensive network of public sector banks, digitalisation of payments and communications at competitively determined low charges using private sector smarts, direct transfer of benefits to 180 million farmers and free cereals with a splash of cereals for 800 million people. These build on top of traditional schemes to help the poor and low skilled -- assured work for 100 days per year at public construction sites, nutrition assistance for women and children.

The third target of enhancing private investment is related to the fourth of boosting household sentiment and putting more money in the pockets of consumers. Four initiatives feed into this target.

First, continuing fiscal consolidation will create the environment to contain inflation, allowing the RBI to lower interest rates, thereby boosting investment sentiment.

Once the Federal Reserve begins its rate-cutting cycle in the United States -- possibly by mid-year -- assuming that President Donald Trump’s policy initiatives end up helping rather than harming the US -- the RBI will have more room to follow with lowered interest rates.

Second, the Budget speech directs the commencement of another round of public-private partnerships. This initiative had levelled off around 2016 despite a rich research literature -- the Kelkar Committee Report on PPP 2015 and earlier the India Transport Report 2014 (R. Mohan). Now each infrastructure ministry is required to develop at least three PPP proposals during the year.

Third, the Budget speech is peppered with new measures to help private investment.

The partial rationalisation of customs duties to boost domestic production and lower costs, the focus on encouraging global supply chains, global capability centres and 100 per cent FDI for insurance companies, all point to the recognition that the open economy model remains best for India -- which is a positive for the growth of a competitive domestic private sector.

Fourth, nuclear energy is to be scaled up with an additional 100 GW of nuclear energy proposed by 2047 with the private sector’s “active partnership”. The big stumbling block to private partnership -- the infamous, onerous liability conditions imposed on the supplier in the event of a nuclear accident, are to be rationalised, paving the way for private participation. A Nuclear Energy Mission for research and development of small modular reactors is proposed to develop five indigenously developed SMR by 2033.

Fifth, the success of the first Fund of Funds for financing startups, in which the first Alternative Investment Fund for startups managed to pull in financing of Rs 910 billion for an initial support of Rs 100 billion from the government, is to be repeated in a second round. Today’s startups could be future unicorns unleashing a wave of innovation and good jobs to boot.

To be sure, some policy elements which cry out for reform fell through the floor. More disclosure on how the transition from FD to debt to GDP ratio as the key metric of financial stability is proposed to be managed, would have been helpful in underscoring that transparency would not be compromised. The long-awaited push for privatisation was also ignored, which does not fit well with the need to enhance the efficiency of public investments. In the past continued support to Air India, and now to keep MTNL afloat, defies logic when private providers stand ready to provide better services.

The expansive welfare measures remain Centrally-driven, rather than transitioned to becoming a core mandate of state governments, as illustrated by a further increase in the number of major schemes (all sectors) which increased from 150 last year to 175 in this Budget. The Budget also reflects a recent and growing trend, where it allocates large sums to projects in state governments which are scheduled to go for elections. This year Bihar -- which will hold Assembly polls later this year -- was the recipient of such favours. This creates the misimpression that capital investments are largely political in nature and not subject to comparative ranking on the efficiency of investment via rigorous technical analysis.

The import tax for cancer medicines and several other products, including intermediate goods for renewable energy, was reduced to increase affordability, even though this contradicts the principle of domestic protection aiding “Atma Nirbharta”.

The import tax reductions went unexplained and will be put down to falling in line with the browbeating stance of the United States (that accounts for 18 per cent of Indian exports) to threaten revenge taxation on imports from countries with protectionist trade barriers. Oversights and minor errors of commission notwithstanding, the 2025-26 Union Budget can be commended for what it achieves: demonstrated responsiveness, as the finance minister asserted, to the pressing needs of the domestic economy in an ocean of global uncertainty.



The writer is a former IAS officer, governance and economic regulation expert and Distinguished Fellow, Chintan Research Foundation

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