Context

• The Union Budget plays a crucial role in shaping a country's economic trajectory.
• The 2025-26 Budget aims to accelerate growth, improve tax structures, and promote fiscal consolidation while addressing emerging economic challenges.
• It is important to examine the key aspects of the Budget, including GDP projections, government expenditure, tax revenues, and concerns regarding fiscal transparency.

Key Aspects of the Budget

• Economic Growth and Capital Expenditure
  • One of the most significant aspects of the Budget is its projection of nominal GDP growth at 10.1% for 2025-26, which is deemed reasonable given the Economic Survey's estimate of real GDP growth between 6.3% and 6.8%.
  • The government's strategy focuses on increasing capital expenditure, a critical driver of economic development.
  • For 2025-26, capital expenditure is estimated at ₹11.2 lakh crore, a slight increase from the ₹11.1 lakh crore allocated in the previous Budget.
  • While the increase is relatively modest, the government aims to sustain growth by boosting infrastructure and industrial investments.
  • However, given India’s aspiration to become a developed economy, a higher growth rate of around 8% in real terms is necessary.
  • The Budget introduces measures to stimulate economic activity, although some policies could have been implemented earlier for greater impact.
• Tax Revenues and Structural Shifts
  • A key feature of the Budget is the shift in the structure of gross tax revenues (GTR) from indirect taxes to direct taxes.
  • Over recent years, the share of direct taxes in GTR has increased from 52% in 2021-22 to 59% in 2025-26, which is considered a positive development.
  • However, despite this structural improvement, tax revenue growth has been declining:
    • GTR growth has fallen from 13.5% in 2023-24 to 10.8% in 2025-26.
    • GST revenue growth has similarly declined, from 12.7% in 2023-24 to 10.9% in 2025-26.
    • Personal income-tax growth has slowed from 25.4% in 2023-24 to 14.4% in 2025-26, partly due to new tax concessions.
    • Corporate income-tax growth was particularly low at 7.6% in 2024-25 but has been projected to recover to 10.4% in 2025-26.
  • Despite these declines, the assumptions about tax revenue growth appear realistic.
• Government Expenditure and the Need for AI Investment
  • The Budget also emphasises fiscal consolidation, leading to a reduction in government expenditure as a percentage of GDP from 14.6% in 2024-25 to 14.2% in 2025-26.
  • Although total expenditure growth at 7.6% is lower than the projected GDP growth of 10.1%, the quality of expenditure has improved.
  • One critical area for government investment is Artificial Intelligence (AI) infrastructure.
  • The Budget recognises that India needs to develop AI capabilities to remain competitive globally.
  • Countries like China and the United States have made significant strides in AI investment, with the US recently announcing a $500 billion AI infrastructure plan.
  • In contrast, India’s technology sector has lagged behind. The government should incentivise AI research and development through tax concessions and public-private partnerships to ensure India remains a leader in emerging technologies.

A Major Contention in the Budget Announcement: Concerns Over Fiscal Transparency

• Departure from the Fiscal Deficit Glide Path
  • Fiscal deficit, the gap between government revenue and expenditure, is a crucial metric for evaluating a country's financial health.
  • In the Medium-Term Fiscal Policy Cum Fiscal Policy Strategy Statement of the 2024-25 Budget, the government had outlined a clear glide path to reduce the fiscal deficit to below 4.5% of GDP by 2025-26.
  • However, in the 2025-26 Budget, the government abandons this explicit target, instead stating that the focus will be on reducing the debt-to-GDP ratio annually.
• Ambiguity in Debt Reduction Strategy
  • The new approach focuses on alternative debt-to-GDP reduction paths rather than specific fiscal deficit targets.
  • The Budget document presents three different scenarios for debt-to-GDP reduction, based on varying GDP growth assumptions (10.0%, 10.5%, and 11.0%) and different levels of fiscal consolidation (mild, moderate, and high).
    • This method introduces greater vagueness into the fiscal planning process:
    • The government does not specify a clear fiscal deficit target for each year, making it difficult to evaluate progress.
    • The alternative scenarios do not provide a definitive commitment to how quickly the government will reduce its debt burden.
    • The reliance on optimistic GDP growth assumptions (up to 11%) increases the risk that debt reduction projections may not materialise if actual growth falls short.
• Risks of High Government Borrowing and Crowding Out Private Investment
  • One major consequence of unclear fiscal deficit targets is the potential for higher government borrowing, which could lead to the ‘crowding out’ of private investment.
  • When the government borrows more from domestic financial markets, it reduces the pool of available funds for private companies to borrow at affordable interest rates.
  • This can lead to higher borrowing costs for businesses, discouraging private sector investment in critical sectors such as infrastructure, manufacturing, and technology.
  • Reduced private investment can slow economic growth, which contradicts the Budget’s objective of achieving high and sustainable GDP expansion.
• Impact on India's Credit Ratings
  • Fiscal transparency plays a crucial role in determining India’s sovereign credit rating.
  • International credit rating agencies, such as Moody’s, S&P, and Fitch, closely monitor fiscal deficit trends and debt sustainability.
  • If fiscal deficit targets are unclear or absent, rating agencies may perceive this as a weak commitment to fiscal discipline.
  • A downgrade in India’s credit rating would increase borrowing costs for the government, businesses, and consumers.
  • Higher interest payments on government debt could divert funds away from productive expenditures like infrastructure, healthcare, and education.
  • To maintain investor confidence and creditworthiness, the government should reinstate a transparent fiscal deficit target framework, providing a clear roadmap for achieving both deficit reduction and long-term debt sustainability.

Recommendations for a More Transparent Fiscal Policy

• Reintroduce a Clear Fiscal Deficit Target: Instead of relying solely on debt-to-GDP projections, the Budget should restore annual fiscal deficit goals, ensuring better accountability.
• Provide a Detailed Debt Reduction Strategy: The government should outline a step-by-step plan to reduce debt levels, rather than presenting multiple alternative scenarios that create uncertainty.
• Ensure Realistic GDP Growth Assumptions: Fiscal planning should be based on conservative growth projections, avoiding overestimation that could lead to fiscal slippage.
• Limit Government Borrowing to Avoid Crowding Out Private Investment: Fiscal consolidation efforts should prioritize reducing the fiscal deficit, preventing excessive public sector borrowing that could hinder private sector growth.
• Strengthen Transparency in Budgetary Disclosures: The Budget should provide more detailed breakdowns of expenditure, revenue forecasts, and borrowing plans, improving public trust and investor confidence.

Conclusion

• The Union Budget for 2025-26 presents a well-structured approach to economic growth, tax reforms, and fiscal consolidation.
• While GDP growth projections are reasonable, capital expenditure needs to be increased further to sustain long-term economic expansion.
• The move away from transparent fiscal deficit targets raises concerns about accountability.
• Fiscal policy should remain clear and specific, ensuring that the government meets its targets without creating uncertainty in financial markets.