Quick take: What do the financial markets know of Budget 2025 that the rest of us too should?
If we go by the financial markets' reaction, the budget signals business-as-usual approach to economic policymaking. The forex, debt and equity markets have remained steady. While it is too early to read the fine print, it does seem to be a business-as-usual budget.
Government is indeed "getting out of the way" but not without burdening the households
The total government expenditure is budgeted to be lower at 14.19% of GDP, compared to 14.55% during the current fiscal year, largely driven by lower fiscal deficit (down from 4.84% to 4.40%). The growth in tax revenue at 10.95% is faster than the expected growth in GDP at 10.1%, implying that the increased government expenditure is being funded by the rest of the economy – not surprising at all, given that the government considers borrowings to be a sin.
The question then is who, in the rest of the economy, is financing the tax revenue. Unsurprisingly, once more, it is the households. The households are expected to bear an increasing proportion of tax burden as seen in the table below:
While the budget has announced an increase in tax rebate, the aggregate tax spending by the households is expected to go up for direct taxes as well as the GST. Though the amount is about Rs. 60,000 crores, it is still a net outflow from the households to the government. It means that the household indebtedness may go up if they choose to maintain their investment and expenditure level.
In short, the households are worse off, though not necessarily all of us. It is, therefore, important for us to dig deeper and assess the impact on different household segments.
In short, the message is that the government debt is sinful, but the households can borrow for their consumption. Such a message is not consistent with our economic reality – the reality that was presented by the Survey just yesterday – declining real earningsfor a large proportion of our population.
Budgeting but not Spending does not help accelerate Growth
We also know that the actual expenditure does not necessarily mean that the money has been spent in reality. We expect to have nearly Rs. 2.33 lakh crores in fourteen funds (0.65% of GDP) sitting unspent on March 31, 2025, in various funds, up from Rs. 1.49 lakh crores in twelve funds during the previous year (March 2024). We probably have much more unutilised allocations in various other funds that are not reported currently. We cannot expect growth or development, if the government itself does spend the money it has raised from the households claiming that it is for their welfare.
During the current year, the capital expenditure too has come short of the budget by Rs 1.0 lakh crore and the next year's budget is about the same as the current year at Rs 11.21 lakh crore. The auspicious looking capital expenditure budget number of Rs. 11,11,111 crores too has let us down.
Rest later.