
With yesterday's announcements in the Union Budget for the financial year 2025-26, fiscal policy has scored higher in the resolve to resurrect India's sagging growth, while monetary policy still languishes with its band-aid solutions to plug short-term liquidity deficits. After the finance ministry's bold measures, even at the cost of fanning some retail inflation, it is now expected that the Reserve Bank of India will finally start cutting rates, something they should have done at least six months ago.
Combined expansionary fiscal and monetary policies have a good chance to free India from its present growth malaise and gradually reach the desired 8 percent rate required for attaining the aim of Viksit Bharat by 2047 (Economic Survey 2024-25). With a growth rate of 6.4 percent in FY25 and 6.8 percent (optimistic) in FY26, India is slated to lose out on Rs 8 lakh crore of national income (considering it had to grow at 8 percent). It will take a lot more than good intent and political will to earn this back while maintaining an average 8 percent growth over the next few years.
The Budget appears to have ticked all the boxes necessary to attain this. However, unlike physical sciences, economics is a subjective and behavioural field. There are no predefined formulas like E equals MC squared that will always hold true come what may. A lot will depend on the extent to which various multiplier effects kick in, given the choices made for allocating expenses in the Budget.
For example, income tax exemption up to an income of Rs 12 lakh will immediately benefit approximately two crore taxpayers earning between Rs 7 lakh and Rs 12 lakh per annum (since those earning under Rs 7 lakh were already exempted), and the revised income slabs will benefit an additional 70-80 lakh high earners. To what extent higher spending from these 2.1 crore taxpayers will trickle down and help the larger population of aspiring Indians needs to be seen.
Additionally, in a year when GDP is not expected to grow beyond 6.8 percent, the decision to keep allocations to MNREGA the same as the last two years despite rising inflation could have a limiting impact on intended job creation. Similarly, there has been a sharp decline in the allocation to Pradhan Mantri Awas Yojana-Urban, likely due to a fall in what was spent in FY25 versus what was announced in the FY25 budget. Also, some balance funds may have been utilised in the new Urban Challenge Fund. Whether it is prudent to reallocate urban development funds when income tax rebates could awaken a demand momentum among the urban middle class to buy homes needs to be seen. Any policy or finance-led bottleneck will be unwarranted when the government is spending Rs 1 lakh crore (tax income foregone due to income tax rebates) to painstakingly revive consumer demand.
Finally, there have been a lot of encouraging comments made in the Economic Survey as well as in the Budget regarding deregulation and ease of doing business. Globally, bankers have been demanding rationalisation in regulations to reduce compliance costs. While it is necessary to have robust rules, especially in the financial sector, it is equally important to maintain a balance between conservatism and growth. Indian regulators should take a leaf out of the intentions expressed by Chief Economic Advisor V Anantha Nageswaran and Finance Minister Nirmala Sitharaman, and promote an environment of light regulation backed by mutual trust.
Moving on to what the Budget could have also included. Considering Indian economic growth is still not out of the woods, a more aggressive stance on public capex could have been a good impetus. The FY26 Budget has raised capex by 10 percent to Rs 11.2 lakh crore after falling short of spending more than Rs 90,000 crore from last year's capex Budget. Every rupee spent in public capex contributes to at least Rs 3 in GDP. Hence, I would have expected the capex to be at least Rs 2.5 lakh crore more than last year's.
Similarly, as mentioned above, MNREGA funds should have been higher by at least 10 percent, and an added focus on urban-NREGA could have been beneficial. Post-Covid, after the heavy migrant outflow from cities, we have yet to see a 100 percent reversal. RBI KLEMS data suggest a rise in agricultural employment post-Covid. These indicate India's rural-urban migratory trend has taken a back seat, impacting productivity. Focussed announcements for urban-NREGA could have helped restore this.
Finally, despite significant liquidity shortages in the economy, forcing non-bank lenders to borrow expensive capital abroad, the Budget did not specify any financial reforms like setting up a National Housing Board-like institution for non-banking financial companies or easing external commercial borrowing norms. While some of these are in the jurisdiction of the RBI, mere references by the finance minister could have set the wheels in motion.
To conclude, I see this is a good budget overall, meeting the expectations of various economic stakeholders ranging from small farmers and urban consumers to investors and industrialists. However, some additional revenue expenditure might have helped in a year when the economy is not expected to bounce back.
I am hopeful about the income tax reforms, foreign direct investments in insurance and overarching views on deregulation. These are expected to complement the government's efforts to revitalise the economy in FY26. Additionally, sound fiscal management will give India a leg up in its debt and money market, which will see a crowding-in of more private sector borrowers accessing funds at a lower rate.
(Views are personal)
Debopam Chaudhuri | Chief economist, Piramal Enterprises