Budget 2025 appears to mark a significant change in economic direction by the Modi Government. The finance minister has cut income taxes for the middle class in a dramatic fashion with the top rate of 30% kicking in at Rs 25 lakh compared to Rs 15 lakh earlier.
Those earning below Rs 12 lakh do not have to pay any income tax after taking the standard deduction into account. The move is clearly a response to discontent --- or at any rate perceptions of it--- among the middle class.
The President’s speech for the joint session had extensive references to the contribution of the middle-class including the move to set up a pay commission for government’s employees, a significant chunk of the middle class. This has clearly played out in the budget.
It remains to be seen if the government works with the GST council to cut rates, particularly the top ones – 28 and 18%. If that happens then it will be a further boost to consumption.
Speculation is also mounting about an interest rate cut at the Monetary Policy Meeting on 7 February which will reduce EMI payouts thus boosting consumption.
End to capex-led growth?
The other key takeaway is that the post-Covid phase of government capex-led growth has culminated. The government capex for fiscal 25-26 is pegged at Rs 11.2 lakh crore compared to the revised estimate (RE) of Rs 10.19 lakh crore in ‘23-24. The BE for this fiscal was Rs 11.11 lakh crore, so the government capex is basically flat. Clearly the intention is to shift to demand-led growth rather than continuing to boost the supply side by building infrastructure, which is largely what the government capex was doing.
Demand had been hit by relatively slower growth of wages compared to profits and the rising burden of EMIs due to relatively higher interest rates. The tax concessions attempt to fix that.
The markets fell after the actual capex spending for the ongoing fiscal was announced as the outlook for growth had become cloudy--- according to a section of the market--- as the state-capex was doing the heavy lifting post-covid. The market will have to adjust its expectations.
Commitment to cutting fiscal deficit
Despite this rather significant adjustment, the Modi government’s commitment to fiscal rectitude comes through. The government has pegged the fiscal deficit for 25-26 at 4.4% of GDP, down from 4.8 % in 24-25. There’s also a plan to reduce the public debt to 51% of GDP by 2030-31 compared to the current level of 58%. That should help India move up from the lowest rung of the investment grade ratings ladder. If that happens Indian companies will be able to borrow at lower rates. The deficit-cutting has been helped by dividends from RBI to the tune of Rs 2.56 lakh crore, the budget estimates for 25-26. The 24-25 number is Rs 2.1 lakh crore. These dividends have helped by the RBI’s selling of dollars.
Economic freedom
Unlike the Economic Survey there is no resounding hosanna to economic freedom. Nonetheless there is expansion of schemes such as ‘Vivaad Se Biswas’ and opportunities for taxpayers to amend their statements without fear of penalty. There is also an iteration of the Jan Vishwas Scheme which seeks to decriminalize various laws.
Nuclear power
Importantly there is a significant initiative in nuclear energy. The budget announced plans to set up 100 GW (1,00,000 MW) by 2047. Importantly the Atomic Energy Act and the Civil Liabilities for Nuclear Damage Acts are to be amended. The latter legislation has been an impediment in the implementation of the India-US Civil Nuclear deal. The move recognizes the importance of sources of stable baseload capacity (normally supplied by environmentally unfriendly coal) as renewable --- solar, wind--- accounts for a larger share of generating capacity. The 100 GW target is in the distant future, but small nuclear modules are to come up sooner. Also, regardless of the views of the Trump administration, India is clear that it is in the midst of an energy transition and has plans to build up leadership positions in associated industries such as solar panels, batteries and electric vehicles.
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