Context

• The Union Budget 2025-26 presented by the finance minister comes at a time of significant macroeconomic challenges.
• While the Budget lays out an ambitious roadmap for Viksit Bharat (Developed India), encompassing key sectors such as agriculture, manufacturing, MSMEs, social welfare, and infrastructure, its execution remains a critical concern.
• Therefore, it is crucial to examine the fiscal consolidation strategy, tax revisions, manufacturing incentives, agricultural initiatives, external sector policies, and climate commitments outlined in the Budget, highlighting both its strengths and limitations.

A Critical Evaluation of Key Budget Announcements

• Fiscal Consolidation: A Questionable Target
  • A key highlight of the Budget is the fiscal consolidation target of reducing the fiscal deficit to 4.4% of GDP by FY26.
  • However, this ambitious goal relies on overly optimistic revenue projections, including an 11.2% increase in total tax revenues and a 14.4% rise in income tax revenues.
  • Given the economic headwinds, such as declining domestic consumption and weakening external demand, these estimates appear questionable.
  • Additionally, the success of the second asset monetisation plan (2025-30) remains uncertain, considering the underperformance of the previous program.
  • The estimated ₹11.54 lakh crore in net market borrowings further raises concerns about potential crowding out of private investment at a time when credit demand is already subdued.
  • Achieving these revenue targets will require improved tax collection efficiency, realistic monetization strategies, and disciplined fiscal management.
• Tax Revisions: Boosting Disposable Income but at a Cost
  • The revisions in personal income tax rates under the new tax regime offer relief to middle-income taxpayers, with incomes up to ₹12 lakh effectively exempt from tax.
  • While this measure may enhance disposable income and consumer spending, it comes at a significant cost—₹1 lakh crore in foregone direct tax revenue.
  • This loss could constrain the government’s ability to fund critical development initiatives, particularly when public investment in infrastructure and social welfare remains vital.
  • Moreover, the tax cuts come at a time when household savings have declined to 18.4% of GDP, raising concerns about their long-term sustainability.
  • The challenge lies in balancing immediate fiscal stimulus with the need for long-term economic resilience.
• Manufacturing Sector: Progress, but Gaps Remain
  • The Budget reaffirms India’s ambition to become a global manufacturing hub, but concerns persist regarding the sector's underperformance, which contributes only 17% of GDP.
  • While production-linked incentives (PLIs) have had moderate success in certain industries like electronics, their scalability and effectiveness remain uncertain.
  • Positive measures such as enhanced credit facilities for MSMEs, a National Manufacturing Mission, and revised MSME classification criteria may improve business efficiency.
  • However, deeper structural issues, such as regulatory inefficiencies, infrastructure deficits, and weak innovation capacity, remain unaddressed.
  • India’s industrial R&D investment stands at a mere 0.64% of GDP, significantly lagging behind innovation-driven economies like China and Germany.
  • Without sustained investment in research, infrastructure, and regulatory reforms, India's manufacturing ambitions may fall short of expectations.

Some Other Key Themes of the Budget and Remaining Gaps

• Agriculture: A Strategic Shift but Missed Opportunities
  • Recognising agriculture as a key economic pillar, the Budget introduces initiatives such as the Prime Minister Dhan-Dhaanya Krishi Yojana and the National Mission on High-Yielding Seeds to enhance productivity and climate resilience.
  • The increase in Kisan Credit Card (KCC) loan limits from ₹3 lakh to ₹5 lakh and targeted interventions in low-productivity districts signal a move towards precision support rather than blanket subsidies.
  • However, these measures do not fully address systemic inefficiencies in agricultural markets.
  • The focus on short-term credit enhancements perpetuates farmers’ dependence on loans without tackling issues like price volatility and market access.
  • Additionally, the Budget misses an opportunity to promote agricultural exports, particularly in emerging sectors like millets and organic farming, which could have positioned India as a global leader.
• External Sector: Inadequate Response to Global Challenges
  • India’s external sector policies receive limited attention in the Budget despite growing trade deficits and currency depreciation challenges.
  • While services exports, particularly in IT and business process outsourcing, continue to perform well, efforts to diversify the export portfolio remain insufficient.
  • Initiatives like Bharat Trade Net (BTN) and export credit support for MSMEs are positive steps but lack the scale necessary to address India’s persistent trade imbalances.
  • Moreover, the Budget fails to introduce a comprehensive export strategy for high-value sectors such as pharmaceuticals, renewable energy, and advanced electronics, which are crucial for integrating India into global supply chains.
  • A more aggressive push in these areas could have enhanced export competitiveness and strengthened India's economic resilience.
• Climate Commitments: Incremental Rather Than Transformative
  • While the Budget signals intent on climate action, its financial commitments remain cautious.
  • Key measures include incentives for lithium-ion battery recycling, duty exemptions on critical minerals, and support for domestic solar and battery manufacturing.
  • These steps aim to reduce import dependence and strengthen supply-chain resilience.
  • However, without parallel investments in grid modernisation, energy storage, and industrial decarbonisation, India's transition to a low-carbon economy will remain fragmented.
  • A more transformative push, such as higher budgetary allocations for renewable infrastructure and carbon capture technologies, would have accelerated progress towards sustainable growth.

Conclusion

• The Union Budget presents a vision for economic growth, fiscal discipline, and structural reforms but falls short in execution strategies.
• While measures such as tax cuts, MSME support, agricultural reforms, and climate initiatives reflect positive intent, concerns remain over their sustainability and effectiveness.
• The fiscal consolidation target appears ambitious, and the reliance on optimistic revenue projections raises questions about its feasibility.
• Ultimately, the success of this Budget will depend on the government's ability to implement its policies effectively while maintaining economic stability.