Budget 2025: Extravagant in rhetoric, eminent in direction

Reform through the annual budgetary announcement is only the start of an ongoing exercise that will need constant nurturing and assiduous implementation.

The sad passing of former PM Manmohan Singh in December last year had ignited memories of the ‘dream budget’ he had presented in the Parliament in 1991. As I write this piece, I reflect on the likelihood of any future FM in India being able to emulate Singh in crafting a ‘dream budget’. It seems highly unlikely, and I mean this not as a criticism but in fact a worthy commentary on what we have achieved since 1991. The Indian economy is significantly more secure now, not immune, but less vulnerable to shocks internal and external, with a war chest of foreign exchange reserves, a fast growing real GDP, and our own maturing willingness to engage externally. There is also growing international recognition of India’s prowess, not least because of what our capable scientists and software engineers have achieved in this regard.

At the same time there is no space for complacency. While major crises and therefore big-bang reforms are increasingly unlikely, minor crises that challenge and oblige India to continue its love affair with incremental or gradualist reform will persist. In fact, many will say we face a crisis of productive employment creation within and a progressively uncertain global environment in which a belligerent US is unwilling to accommodate development it had committed to in Doha in 2001 specifically with the intention of integrating developing nations into global trade to enable them to reap benefits of those linkages.

Budget-making in the shadow of a potential global trade war

It was in this backdrop of high but weakening recent growth, an employment dilemma and a threatening outburst originating from the United States about the grievous harm done to it by the protectionist policies of countries like China, Mexico, Canada and India, to name a few, that Finance Minister Nirmala Sitharaman presented her eighth straight budget on 1 February 2025.

Soon after, President Trump slapped tariffs on Mexico Canada (both now kept in abeyance for a month) and China, which retaliated. It in the nature of this current US presidency that it would be impossible to predict what lies ahead. For the moment he has unleashed the start of what could turn out to be a global trade war that will not only dampen universal growth prospects, but also put pressure on countries to look inward for growth drivers.

Why a push for labour intensive manufacturing matters

So does the budget in its role as a reform document provide safeguards to support growth, create a thrust for more formal employment and crucially protect itself in an increasingly uncertain global environment?

The answer is one that most people dread to hear, yes, but it depends. One the one hand, the FM has made a reassuring beginning by focusing on labour-intensive sectors such as toys, leather, and food processing to boost employment. When a larger share of the income pie goes to labour – rather than capital -- consumption will get a sustained boost, and complement the tax breaks given to the middle class.  The former is structural, the latter a one-time measure.

This push has been long overdue since India’s comparative advantage lies in its abundant factor. Customs duties are being rationalized, the inverted duty structure being corrected and mercifully no increase in tariff was announced. This should give small and medium enterprises a boost. The message to industry seems to be, growth behind tariff walls is no longer possible or feasible for India. On its part, the government has promised better governance, to assess efficacy of regulations through impact evaluations, and to convert India Post into a logistics organization, a subtle pointer that India’s logistics cost/GDP is still high.

On the other hand, reform through the annual budgetary announcement is only the start of an ongoing exercise that will need constant nurturing and assiduous implementation.

India’s growth rate needs to pick up speed

The FM also used the budget speech to praise her government’s achievements since 2014.  There was extravagant rhetoric evidenced in ‘Heal in India’ ‘Make in India’, ‘Make for India’, ‘fastest growing major economy’ all of which are instruments of the grand design to make India Viksit or developed by 2047, 100 years after our independence. In the life of a nation, the two decades and some to 2047 is not very far. While Viksit captures the aspirations of the young Indian population, our 6-7 percent growth will not cut it.

It is not enough to delight in the fact that we are the fastest growing major economy, but also compare our rate with that of say China when it was at the level we are today. China grew furiously at double digits for three decades to get where it is today. If not in double digits, we will need growth of 8 percent and above to reach our goal.

The share of agriculture will have to fall to single digits from around 14 percent today and the released workers absorbed in labour intensive manufacturing. The budget does set the path. There is significant investment allocated to agriculture and allied activities for it to become more productive, although the mantra of doubling farmers announced in 2015 has been muted.

The boost to non-farm labour intensive manufacturing and linking these to export markets is eminently the right direction for our relatively less skilled and under educated population.

Another feature that stood out this year was the focus on tertiary education especially in AI and on science and technology. More resources have been provided for investments in existing IITs and there are plans for more. It is a testimony of the times we live in that science research obtains extensive support. China’s DeepSeek has shook the world as yet another example of the profoundly disruptive power of technology. While tech attracts funds, the social sciences and humanities feel ignored. One could argue that the humanities do not need vast resources. But to ignore it especially in a deeply divided world is likely to be a stumbling block in India’s ambition to become Viksit.

Another lacuna is the inadequate attention that we continue to pay to education at lower levels. Producing a population that is literate and ready for skilling is necessary for labour intensive manufacturing and as a stepping stone for Viksit Bharat.