Budget 2025: Balancing Tax Relief and Growth Priorities

Syllabus:

GS-2:

Indian Constitution , Government Policies & Interventions

GS-3:

Growth & Development , Planning ,Government Budgeting , Fiscal Policy , Inclusive Growth

Focus:

  • The Union Budget for FY 2025-26 announced a massive Rs 1 lakh crore tax relief for income taxpayers.
  • The expectation is that this tax relief will boost consumption demand and push GDP growth above 6%.
  • However, tax breaks often come at the expense of crucial spending on sectors like education, health, and skill development.

Budget 2025: Balancing Tax Relief and Growth Priorities

Budget 2025: Balancing Tax Relief and Growth Priorities

Budget 2025: Balancing Tax Relief and Growth Priorities

Understanding the Union Budget:

  • Article 112 of the Constitution mandates the presentation of an Annual Financial Statement to Parliament, detailing estimated receipts and expenditures for the financial year (April 1 to March 31).
  • It comprises three parts: Consolidated Fund, Contingency Fund, and Public Account, each requiring detailed statements of receipts and expenditure.

Key Features of Union Budget 2025-26:

  • The Finance Minister quoted Telugu poet Shri Gurajada Appa Rao’s saying: “A country is not just its soil; a country is its people.”
  • The budget emphasizes Viksit Bharat (Developed India), guided by six principles:
  • Zero poverty
  • Quality education for all
  • Affordable, high-quality healthcare
  • Skilled workforce with meaningful employment
  • 70% women participation in the economy
  • India as the ‘Food Basket of the World’

Prioritized Sections

  • Poor (Garib), Youth, Farmers (Annadata), and Women (Nari)
  • Focus on boosting growth, attracting private investment, empowering the middle class, and uplifting households.

Key Reform Areas

  • Taxation, Power, Urban Development, Mining, Financial Sector, and Regulations to enhance India’s competitiveness.

Growth Engines

  • Identified engines for Viksit Bharat:
  • Agriculture, MSMEs, Investments, and Exports, with inclusivity as the guiding principle.

Major Sources of Revenue from the Union Budget 2025-26:

  • Direct Taxes (₹12.5 lakh crore)
  • Income tax reforms including tax relief for incomes up to ₹12 lakh.
  • Enhanced tax brackets for salaried taxpayers to boost voluntary tax compliance.
  • Indirect Taxes (₹11 lakh crore)
  • GST collections remain a significant contributor.
  • Basic Customs Duty (BCD) exemptions for EV components, textiles, and life-saving drugs.
  • Non-Tax Revenue (₹4.5 lakh crore)
  • Dividends from public sector enterprises.
  • Spectrum auction proceeds and other government fees.
  • Capital Receipts (₹6 lakh crore)
  • Disinvestment and privatization of select public sector undertakings.
  • Borrowings to manage fiscal deficit.

Fiscal Policy and Economic Growth:

Fiscal Policy Components

  • Fiscal policy involves the government’s taxation and expenditure
  • Lower taxes: Leave consumers with more money to spend, triggering economic activity.
  • Higher capital expenditure: Spending on productive assets boosts overall GDP growth.

Disappointing Fiscal Impulse

  • Despite the tax break, the fiscal impulse (impact on GDP growth) remains negative or neutral.
  • Independent research by HSBC suggests a negative fiscal impulse, while Nomura calls the budget neutral for growth.

Post-COVID Budget Impact

  • Since the pandemic year 2020-21, the fiscal impulse has remained neutral or negative, indicating limited contribution of Union Budgets to economic recovery.

Budget Trends and Sectoral Allocations (FY15 to FY25):

Overall Economic Growth

  • India’s nominal GDP grew at 10% annually during this period.
  • Per capita GDP: Grew at 9%, but average expenditure per Indian grew faster at 9.5%.

Government Expenditure Growth

  • The size of the Union Budget expanded at 8% annually, higher than nominal GDP growth.
  • The share of the Budget in GDP increased from 3% in FY15 to 15.6% in FY25, contradicting the slogan of “Minimum Government, Maximum Governance.”

Sectoral Budget Allocation Analysis:

Education

  • Allocation increased from Rs 69,000 crore in FY15 to Rs 1.14 lakh crore in FY25, growing at 2% annually.
  • Despite this, education spending as a share of the Budget declined from 4% to 2.2%.
  • The allocation is inadequate given the demands of technological advancements like AI.

Skill Development

  • Allocations grew at 14% annually, but the total allocation remains low.
  • From Rs 0.01 lakh crore in FY16, it increased to Rs 0.03 lakh crore in FY25, which is just 06% of the total Budget.

Health and Family Welfare

  • Allocations grew in sync with the overall Budget but remain at just 7% of total expenditure.

Employment (MG-NREGA)

  • Allocations followed a similar trajectory as health spending, with limited growth.

Food Subsidy

  • Spending grew at a mere 5% annually, despite increased assistance during the pandemic.

Capital Expenditure

  • Capital expenditure increased by 18% annually, making it a hallmark of the Modi government.
  • Capex now accounts for over 20% of total expenditure, essential for infrastructure development.

Fiscal Deficit

  • The fiscal deficit rose from 1% of GDP in FY15 to 4.8% in FY25, exceeding the recommended limit of 3%.

Key Takeaways:

No Free Lunch in Tax Breaks

  • Large tax reliefs often result in cuts to essential sectors such as education, health, and skill development.

Need for Strategic Spending

  • With the rise of artificial intelligence and technological changes, India must prioritize education and skills to remain competitive globally.

Income Tax Cuts and Tax Base Concerns

  • The current tax cuts mainly benefit those earning five to six times the average Indian’s income.
  • Shrinking the tax base amid calls for expanding it could hinder India’s ability to reduce the tax burden on all.

Long-Term Growth Focus

  • It remains uncertain whether tax cuts are the best strategy for sustained long-term growth, as public investments in critical sectors are often more impactful.

Conclusion:

While tax relief may stimulate short-term consumption, chronic underfunding of vital sectors poses risks to India’s long-term economic growth. A balanced approach with strategic public investments in education, health, and infrastructure is essential to ensure inclusive and sustainable development.

Source: IE

Mains Practice Question:

Q: The Budget 2025-26 focuses heavily on tax relief but underfunds critical sectors like health and education. Discuss the implications of this strategy on India’s long-term economic growth and suggest corrective measures.