Budget and Its Two Pillars: Private investment and middle class

The government rationalized tax provisions for FPIs in the Budget for FY26

With total revenue receipts projected to increase by 9% (BE FY26 over BE25), at a pace lower than the nominal GDP growth assumed at an optimistic 10.1%, and the government’s commitment to maintaining the fiscal deficit target at 4.4%, it was incumbent upon the finance minister to slow down the growth in public expenditure compared to previous years. Thus, total budgeted expenditure is slated to rise by only 5% in FY26. Public capex will remain virtually unchanged at Rs 11.2 trillion compared to Rs 11.11 trillion in FY25. Does this imply that the government has recognised the limits to its capacity for efficiently utilising public capex? I hope so. The past three years have also shown that the sharp increase in public capex was not as effective in crowding in private investment. Therefore, the government has apparently realised that it is more productive to be directly supportive of private investors and entrepreneurs across the board.

The setting up of the high-level committee to examine the plethora of compliances, inspections, and regulations, including those in the financial sector, is a step in the right direction. I hope that the finance minister herself would chair the committee, which could be made into a coalition of ‘willing state finance ministers’ who would like to reduce the regulatory cholesterol in their system. The committee should also be mandated to review the operation of the various ‘agencies’ which have reportedly exacerbated the climate of fear and unpredictability in recent years. Importantly, it should have an empowered secretariat to monitor the timely implementation of its recommendations.

It would have been even better if the budget acted on the Prime Minister’s long-standing axiom of ‘government has no business to be in business’ and announced the privatisation of loss-making public sector enterprises. They are a drain on the budget, serve as an avoidable example of corporate inefficiency and profligate behaviour, and encourage crony capitalism. I hope the announcement for making a plan for asset monetisation of Rs 10 lakh crore by 2030 will also include provisions for additional revenues from PSE privatisation.

Private investment will also be given a fillip by the budget announcement of doubling the capital stock limit for small and medium enterprises from Rs 250 crore to Rs 500 crore. This is also supplemented by enhancing the credit limits for MSMEs, creating a new fund of funds for Rs 10,000 crore, and empowering micro enterprises with a credit card. The focus on labour-intensive sectors like leather, toys, and food processing is welcome, as these help generate both more jobs and exports. It is vital for India to grab a larger share of world manufactured exports even while ‘slobalisation’ is becoming the norm. The export promotion mission, announced in the budget, will do well to co-opt not just the three ministries but also export-oriented state governments because they are vital players in expanding exports. It will be synergistic and efficient to create as many linkages as possible between the export promotion and the national mission for manufacturing. They surely represent the two sides of the coin.

Contrary to popular belief, the budget shows that good politics can also be good economics! The reduction in personal income tax rates, including the sharp rise in exemption limits to Rs 12.00 lakh (Rs 12.75 lakh for salaried employees), seems to have been targeted at the forthcoming Delhi assembly elections. After all, it is critical to win over the middle-class constituency in this mega city. The measure was, however, also surely required to shore up the lagging private final consumption demand over the past three years. It was 61.1% of GDP in 2020-21 and has declined to 60.3% in 2023-24. Slackening private urban consumption demand will be given a shot in the arm with the sharp increase in exemption limits and also the regrading of the tax slabs with lower tax incidence on incomes between Rs 15 lakh and Rs 25 lakh. The finance minister, with good reason, was at pains to elaborate that these changes in the tax slabs will yield substantial gains in disposable incomes for the middle class.

On the other hand, we must keep in mind that India has the lowest proportion of tax-paying households, with only 3% in the tax net, and of these, up to 60% do not pay any tax. The rise in exemption limits, which are an incredible five times (500% +) the level of national average per capita incomes, could be seen as increasing inequity in the economy. This can also be addressed only by accelerating the growth momentum and generating a substantially larger number of jobs. Efficient implementation of welfare-raising government schemes like public housing, expanding coverage of piped water, improving primary education facilities, etc., can also ameliorate some of the inherent inequity. It is clear that the Indian middle class still has greater political clout than its counterparts in other countries.

In a replication of the rather successful aspirational districts programme of NITI Aayog, 100 backward agricultural districts will be selected for a focused attempt at improving farmers’ welfare and income levels. It is expected to benefit 1.2 crore farmers, improve yields, and help achieve Atmanirbharta in edible oils and pulses. We wish the scheme success. However, it is important to recognise that farmers all over the country are now faced with declining returns on chemical inputs, sharp worsening of soil health, declining groundwater availability, and hence rising farmers’ distress. I must therefore confess to my disappointment in not finding a mention of regenerative or natural farming in this year’s budget. Hopefully, some good news on this front is tucked away in the budget minutiae.