
By the end of the week, Finance Minister Nirmala Sitharaman will present her second Budget in quick succession. Just like it happens every year, there are expectations from businesses and people who always want the government to step in and do more.
The government’s action depends on the state of the government’s finances. That has more to do with the estimated tax revenue from businesses and individuals. The Union Budget no longer makes any significant changes in indirect taxation. The only exception is import duties. The goods and services tax (GST) is out of the ambit of the Budget.
The GST council, which comprises centre and state finance ministers, makes any changes to GST. So, making things cheaper or expensive is no longer a part of the Budget. So, that is the first thing you should not expect.
Headline numbers show that the government is doing well on the direct tax front for the financial year 2024-25. There is good growth in the collection of corporate and personal taxes. The GST revenue also maintains the momentum of monthly collection. An essential piece of data to look for in the Budget is the estimated state of government finances in 2025-26. Financial markets will react to the estimates. If you are an investor, you want your government to manage finances better without borrowing too much and burdening the banking system and taxpayers.
The picture is not a rosy one. The global uncertainty continues and there is a visible slowdown in India’s economy. All significant estimates for economic growth are now lower than expected. The World Bank estimates that India will grow 6.7% yearly over the next two years. For 2024-25, it is already at the slowest pace than the long-term average in 2010-19.
Most companies that focus on urban consumption have faced a slowdown. There is pressure on the government to put more money into urban high-spending consumers’ hands. While you may think there could be dramatic tax cuts, you may have to hold your horses. Many states have already extended cash benefits to women and other people in the lower-income strata. At the same time, promises are being made in states heading into an election in 2025-26. The government would be mindful of that while determining the rationalisation of direct taxes they may take up. As a result, you may have to tone down expectations.
It will be a significant policy decision. If the government rationalises direct taxes further, the tax revenue growth that looked buoyant in 2024-25 would get under pressure. At the same time, the government would have to continue to allocate more resources for capital expenditure to enhance the physical infrastructure in the country further. A survey of the economists by the Federation of Indian Chambers and Commerce and Industry, an industry body, recommended a 10-15% jump in capital expenditure over 2024-25.
The government allocated over Rs 11 lakh crore to the Budget last year. An increase of 15% would be a significant amount.
What it means to you
Income tax could be rationalised to provide relief and spending power to the urban middle class.
However, you must not expect the government to make everyone happy. If they offer any direct benefits to you, it is not such a good thing for your investments. India needs you to deploy your savings into financial assets over the next 20 years to become a developed country.
You may expect the government to offer some incentive for long-term equity investments.
Even systematic investment plans in mutual funds have a withdrawal rate of 90%, according to the data from the Association of Mutual Funds in India. Fewer people are staying invested to generate meaningful returns. For India’s households to create wealth, that must change.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)