Union Budget 2025 | Growth goals and tweaked targets

Policy reforms in the budget signal intent but how viable is the path to fiscal consolidation?

The Union Budget 2025-26, the second budget of the NDA 3.0 government, has come against the backdrop of a dramatic uptick in geopolitical risks and tensions, a slowdown in economic growth in India (6.4 per cent in 2024-25 as against 8.2 per cent in 2023-24) and inflation rate measured in terms of combined consumer price index at 4.8 per cent for 2024-25 as against an average 4 per cent in the flexible inflation targeting mandated for RBI. This is a bad climate.

If we need a mood-changer, look no further – the headline grabber is the personal income tax reform, with the announcement that no income tax will be payable for income up to Rs 12 lakh per annum under the new regime. The threshold works to Rs 12.75 lakh for salaried taxpayers, due to the standard deduction of Rs 75,000. Furthermore, other slabs and rates have been revised to benefit all taxpayers, resulting in a higher disposable income in the hands of households, which will boost consumption, savings, and investment.

The focus of the fiscal policy stance as enumerated in the budget includes (a) fostering equitable and sustained growth, (b) tax reform, particularly personal income tax, (c) increasing spending power, (d) increasing public capital spending, (e) adopting a
“saturation approach” to social welfare and development and more importantly, (f) framing a fiscal consolidation
path with an end target, without intermediate targets.

To reach the goals of Viksit Bharat, firstly, the budget has focused on spurring agriculture growth and building rural prosperity through schemes such as the Prime Minister Dhan-Dhanya Krishi Yojana and enhanced credit to farmers. The budget has supported MSMEs with credit cards for micro-enterprises, by launching a scheme for first-time entrepreneurs, focusing on ease and cost of doing business, facilitating employment in labour-intensive sectors, and revising the classification criteria for MSMEs in terms of investment and turnover. It has also focused on promoting exports with an export promotion mission.

These features are welcome steps. However, questions emerge on the fiscal consolidation path “with an end target but without intermediate target”. It is claimed that “the aim was to equip the government with requisite operational flexibility so as to respond to exigencies arising at a time of high uncertainty”. Thus, from the fiscal year 2026-27, the government will focus on the debt-to-GDP ratio as the fiscal anchor in place of fiscal deficit as a target. This implies that the fiscal deficit-to-GDP ratio of 3 per cent will not be in sight of the government and will likely be breached. Instead, the effort would be to keep the fiscal deficit such that the debt-to-GDP ratio will be 50 (+/- 1 per cent) by March 31, 2031.

In the above context, it is pertinent to note that the budget is an annual exercise that operationalises the government’s fiscal policy aimed at moving the economy to a higher growth trajectory, lowering unemployment, and ensuring the stability of the economy. The Indian authorities have been following since 2003 a rule-based fiscal policy in the mandatory framework of the Fiscal Responsibility and Budget Management (FRBM) Act. In a rule-based fiscal policy, there are three rules: deficit rule, debt rule, and borrowing rule. While adhering to the deficit and debt rules, the authorities fix the level of deficit and debt as a percentage of GDP. In the borrowing rule, the authorities prohibit themselves from borrowing from the central bank by printing money. This is a critical self-imposed discipline India has been following.

Rule vs standard

The argument to shift to an end-target (debt-GDP ratio) in place of an intermediate target (fiscal deficit-GDP ratio) builds on a “conscious” policy choice aimed at moving away from a regime characterised by “rigid fiscal rules
towards flexible fiscal standards.” This follows the argument that “fiscal rules are prescriptive and focus on achievement of numerical targets, fiscal standards are general objectives that have to be followed.”

Here’s a cautionary note: A rule should not be confused with a standard. As alluded to earlier, we need a deficit rule and a debt rule. In the Indian context, keeping in view the budgetary practice with a revenue and capital account, the budget should not have a revenue deficit and the government should not borrow to meet the revenue expenditure as it is happening currently. Furthermore, a revenue deficit of 1.5 per cent of GDP as budgeted for 2025-26 reflects the dis-savings of the government and can adversely impact economic growth. Therefore, the priority is to eliminate the revenue deficit. In this context, it is important to note that the income tax buoyancy of 1.30 for 2025-26 is lower than the average buoyancy of 1.74 recorded in the past five years ending 2023-24. Thus, increasing tax buoyancy is critical for the elimination of revenue deficit to ultimately promote growth, given the inflexibility of reducing revenue expenditure. It is important to explicitly state the fiscal deficit-to-GDP ratio in the FRBM Act.

The standard budgetary practice is to place capital expenditure at a higher level in the budget estimates and subsequently reduce the same to a lower level to show a lower fiscal deficit-to-GDP ratio. This deviation is against prudent fiscal management. Illustratively, this happened during the 2024-25 revised estimate where effective capital expenditure was reduced from Rs 15,01,889 to Rs 13,18,320 – a reduction of 13.9 per cent. To arrest this tendency, we may need an expenditure rule, particularly for the capital expenditure-to-GDP ratio.

The Union Budget 2025-26 has outlined a useful journey with policy measures to reach the destination of Viksit Bharat but there are important questions on the prescribed path of fiscal consolidation by moving from the fiscal rule to fiscal standard.

(The writer is a former central banker and professor at the Gokhale Institute of Politics and Economics, Pune; Syndicate: The Billion Press)

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Union Budget 2025 | Nirmala Sitharaman, as Finance Minister, presented her record 8th Union Budget this time. While inflation has burnt a hole in the pockets of 'aam janata', the Modi govt gave income tax relief for those making up to Rs 12 lakh per year in salaried income. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.