Budget for sustained growth

The last 10 years have witnessed an administration that has ensured that it walked the prudent path on fiscal management and invested heavily in building infrastructure. Now faced with a slowing and highly uncertain global economy, a domestic economy performing under par, Finance Minister Nirmala Sitharaman unveiled one of the most progressive budgets as she unveiled a stimulus unexpected by almost everyone. Perhaps, the most important facet of the budget has been the tightrope walk between fiscal prudence and delivering a consumption-based stimulus while maintaining a progressive stance on carrying out investments. This approach is in sharp contrast to the expansionary policies of several emerging economies, where fiscal prudence has been sacrificed for growth imperatives.

The immediate challenge facing the Indian economy has been the weakness in consumption demand, particularly evident in urban areas.

The middle class, facing persistent inflationary pressures and stagnant real income growth over the past few years, has been particularly impacted. Recognising this stress, the FM has provided significant relief through direct tax reforms. The new tax regime now offers zero tax up to Rs 12 lakh income (Rs 12.75 lakh for salaried), effectively putting Rs 80,000 back into the pockets of middle-class taxpayers. The impact of this move is likely to cost the administration around Rs 1 lakh crore in terms of tax foregone while also reducing the number of people who actually pay tax. However, this also likely to help spur the economy by giving a boost to consumption with the multiplier effects being larger at the lower ends of the income brackets. It also helps lift spirits of the all-important middle class that provides skilled labour force to help propel the economy.

Strong capex momentum

That said, the FM hasn't relied solely on consumption stimulus, maintaining strong capital expenditure momentum with effective capital expenditure, which is around 21 per cent of the total expenditure, planned at Rs 11.1 lakh crore in FY26, the same as the BE from last year. While some see this as a change in strategy, this still means an impressive 10.1 per cent growth over the revised estimates for last year. The bulk of the capex budget is earmarked for the transportation sector (45.7 per cent share in total), followed by defence at 16.1 per cent. This trend of ensuring capital expenditure across multiple budgets will push up the potential growth of the economy.

Most impressively, these growth supportive measures come alongside continued fiscal consolidation. The fiscal deficit target of 4.4 per cent of GDP for FY26 represents a 40 basis point reduction from FY25's 4.8 percent, maintaining the glide path promised in the previous budgets. Over the next six years, the government aims to reduce the debt to the GDP level to -50 percent, i.e., by 31 March 2031. This shows that the government does not want to tie itself to a point estimate, ensuring flexibility, yet still continue to move towards much lower levels of debt signalling responsible spending.

The structural reform agenda adds another dimension through three critical channels. First, the MSME sector reforms, including enhanced credit guarantees and revised classification criteria, could catalyse the crucial mid-market segment. Second, the agricultural transformation agenda signals a potential boost to rural income growth. Third, the export ecosystem strengthening positions India towards its ambitious export target by 2030. Overall, the budget for 2025-26 represents sophisticated economic management, balancing multiple objectives while maintaining policy credibility.

This article first appeared in the BW Businessworld magazine on 22 February 2025.