A budget that scores on four of five essential criteria

The standout aspect of this year's budget no doubt is the government's commitment to fiscal consolidation.

By Rajat Verma and Laveesh Bhandari

Budgets can be judged under different lenses, and no matter what any finance minister (FM) does the glass is always half full. Be that as it may, we believe that the key criteria for judging any budget are that it be transparent, not overly intrusive (in terms of taxation), not overly ambitious, yet not be too conservative, and all of this while ensuring that the deficit, and consequently debt levels don’t get out of hand.  We believe that the budget scores high on four of these five criteria.  It could have been a bit more ambitious in what it seeks to achieve, but perhaps high levels of global uncertainty motivated the FM to err on the side of caution.

Fiscal consolidation is the highlight

The standout aspect of this year's budget no doubt is the government's commitment to fiscal consolidation. The fiscal deficit for 2025-26 is estimated at 4.4 percent of GDP, a notable reduction from the 4.8 percent revised estimate for 2024-25. The roadmap outlined in the Fiscal Responsibility and Budget Management (FRBM) Act further underscores the intention to maintain the union government’s debt on a declining trajectory. This is a prominent step in the appropriate direction of bringing the deficit down to the prescribed 3 percent level.

Jury’s out on the personal income tax changes 

The introduction of new direct tax slabs under the reformed income tax regime is a significant move, but it's not clear whether it is an improvement or not, as it is not clear to us how much of a long-term consumption boost this will yield economically.  Politically as well middle class is quite fickle, and it's not clear whether the government will get its support in other more difficult reforms. But it is quite evident that by ensuring no tax liability for individuals earning up to Rs12 lakh per annum the government also aims at getting more people to report their incomes.

Interesting signals

The plan to develop 100 GW of nuclear capacity by 2047 reflects an ambitious move towards energy security. While nuclear energy offers a stable and low-carbon alternative, safety concerns, high costs, and long development timelines need to be managed carefully.  Toward that end, the allocation of Rs 20,000 crore to support Small Modular Reactors (SMRs) for private-sector-driven R&D initiatives, and establishing a Nuclear Energy Mission signal India’s intention towards a cleaner Viksit Bharat. More importantly, the government has signalled that it will not put all its eggs in the public sector basket where energy is concerned and that’s a very powerful signal.

Moreover, we believe that the focus on transmission equipment is critical if India’s march towards greater Renewable Energy is to be sustained.  Such investments complement, rather than overshadow, progress in other renewable sources such as solar and wind energy.

The ‘BharatNet’ initiative where the government aims at providing digital public infrastructure to approximately 2.5 lakh Gram Panchayats, broadband access to schools, hospitals, Anganwadi, etc. will no doubt help reduce the digital divide across rural and urban regions, and in the process also create avenues for rural youth to join the digital mainstream.

Moreover, the government's efforts to promote capital expenditure and incentivise reforms through interest-free loans to states highlight a strategic approach to economic development. The capex aggregating to above 11 lakh crores is indeed highly creditable.  We would have liked to see greater investments in agriculture warehousing and value chains but it is also true that much of the other infrastructure needs need to be put in place to enable high growth.

Tariff rate measures are mystifying

But it is the duty reductions that are most interesting.  While it took us some time to understand the logic of it, we are not sure we agree with it.  The government has reduced tariff rates on a slew of products including those in electronics and textiles etc.  High tariff rates the way they have historically been put up in India, protect a few large firms at the cost of the Micro, Small and Medium Enterprises (MSME) sector.  Reduction in customs duties therefore is to be welcomed.  But then the government has also increased the cess on the products, effectively neutralizing the reduction. So, the MSME sector is not helped.  Then why do it? We obviously don’t understand it. Perhaps this is in response to Donald Trump's threats. Or perhaps the government will reduce or eliminate the cess later.  And this is where the government is being a bit too defensive, we believe, lower duties are important not for America to benefit, but for Indian entrepreneurs and consumers to benefit as well.

Overall, however, by keeping the deficit under check, increasing investments, and investing in the future, the FM has done well. She of course could have done more.

(Rajat Verma works on Public Finance and Macro modelling at CSEP, and Laveesh Bhandari heads it.)

Views are personal and do not represent the stand of this publication.