Budget 2025: GoI puts its heart (on households) where spending should be

In her relatively short - 1 hr 14 min - budget speech on Saturday, Nirmala Sitharaman clearly saved the best for last. The slew of changes in I-T slabs announced at the end is likely to make a meaningful difference to disposable incomes, particularly for the lower and middle tiers of the Indian middle-class.

This bet, a textbook countercyclical macro policy gamble, is on getting the momentum in consumption demand - tepid for few years now - back to boost economic growth even if it means giving up some immediate tax revenue. This strategy seems imperative, given the current global and domestic economic situation.

Why? First, export demand for the next fiscal year looks uncertain, what with the risk of global tariff wars and a consequent compression in global trade. Second, domestic private investment demand has remained below expectations despite vast improvements on the supply side of the economy, particularly infrastructure.


Clearly, while uncertainty in the global economy will continue to weigh on the minds of private companies, more spending by domestic households may just get companies to start building assets.

Mercifully for fiscal hawks, this has not come at the cost of fiscal laxity. Fiscal deficit targeted for 2025-26 is at 4.4% of next year's GDP, actually a little below the mandated glide path. Capex doesn't get short-shrift either, and is roughly at the same level as last year's budget estimates. Finally, this is premised on fairly conservative estimates for GDP growth of 10.1% in nominal terms.

The maths works because of a few things:

Tax relax
Growth in overall tax collections is budgeted at 10.8%, a trifle higher than nominal GDP. While that seems doable, the task seems a little more challenging if one nets out the revenue of around ₹1 lakh cr foregone due to tax breaks. That takes the effective tax growth up over 13%. Hopefully, better compliance and stronger growth will take care of this.

PSU-per power
Dividends from PSUs, according to RBI estimates, are a hefty ₹3.25 lakh cr, significantly higher than in the previous fiscal year. This is likely to be met as RBI would have made substantial rupee profits through its aggressive forex interventions over the last few months.

Spend check
Revenue expenditure is kept on a tight leash at just 6.6%. One might see a problem with this harnessing of revenue expenditure. The consumption problem is not solely a middle-class problem. The lower-income deciles, too, contribute to consumer demand.

Some support - perhaps higher MGNREGA wages or a revision in PM-Kisan - may have been warranted. That said, in solving the 'constrained optimisation' problem of policy-making, to use CEA V Anantha Nageswaran's words, you can't please them all.

Now from the minutiae to the big picture. Modi 3.0's first full budget speech does provide a clear vision of its economic strategy going forward. The emphasis is on employment-intensive growth that, going by Sitharaman's speech, MSMEs and low-end services are best equipped to deliver. Hence the specific emphasis on sectors like leather, toys and tourism.

The German 'Mittelstand' model of stable, well-supported medium industries, first referred to in the 2023-24 Economic Survey, remains the template for India's growth momentum.

But the Mittelstand is not without its problems. While it may have been Germany's industrial powerhouse for decades, it seems to be faltering in the new age of constant technological disruption. GoI needs to remain sensitive to the needs of big corporations, and also ensure that its support to the MSME sector does not create perverse incentives to remain small. Being too small runs the risk of missing out on the economies of scale, particularly the ability to adopt new tech.

The one big reform measure that stands out is the emphasis on untangling the web of regulations and rules that compromises the competitiveness of Indian firms and stands in the way of investments, be it domestic or foreign.

The continuing decriminalisation of legal provisions for industry is commendable. One hopes that the high-level committee for regulatory reforms announced can take a step jump towards easing doing business and reducing cost of doing business. That said, much of the red tape lies in backyards of states. They must take a cue from GoI.

Some questions continue to niggle. Why has disinvestment, earlier seen as the panacea for our fiscal woes, continued to disappoint? What has progress on skilling programmes, such as the internship scheme announced in the July 2024 budget, been? Why have surveys on primary and secondary education, such as the recently released Aser survey, shown such poor outcomes? Will this not impede skill development?

A palpable slowdown in economic activity, captured in the advance estimates of 6.4% GDP growth, had everyone hoping for the proverbial big bang budget. With the overarching task of reducing fiscal deficit and paring public debt as binding constraints, this budget, with its bold tax cuts, was as close to a bang as it could get.