By Dr VK Vijayakumar
Finance Minister Nirmala Sitharaman will be presenting the Union Budget for 2025 under challenging times. Last year the finance minister was comfortably placed. The economy was in a sweet spot: GDP growth for FY24 surprised on the upside with 8.2 per cent growth; revenue growth came better-than-expectations at 18 per cent; and the government got an unexpected bonanza of Rs 1 lakh crore as additional dividend from the RBI.
This year, the picture is different. GDP growth has slowed down to an estimated 6.4 percent. Personal income tax collections are good, but GST revenue growth is modest and corporate tax collections have slowed down. The additional bonanza which the government got from RBI last year will not be available this time.
The biggest challenge: The biggest challenge before the government is to provide the fiscal stimulus for reviving the GDP growth in India. After achieving above 7 per cent GDP growth during the three-year period from 2022 to 2024, growth has declined to an estimated 6.4 per cent in 2025. Top priority of the government should be the revival of growth. Indian economy now needs both monetary and fiscal stimulus. Monetary stimulus by cutting interest rates is likely in February. The government can set the trend through fiscal stimulus in the new budget.
Tax relief: Personal income tax cuts will serve two purposes. One, it will provide the much-needed relief to taxpayers, particularly the middle class, who have been impacted by inflation. Two, tax cuts will increase the disposable income of taxpayers facilitating higher spending. This will boost consumption and stimulate growth. Therefore, personal income tax cuts can be expected from the Budget. There are claims for big tax cuts and rumors of major rate cuts with exemption limit being raised to Rs 10 lakh. Such big reliefs are unlikely. Personal income tax collection has been doing well mainly due to better compliance facilitated by digitalization. If exemption limits are raised steeply a significant segment of taxpayers will go out of the tax net. The government is unlikely to do this, particularly in the present context of slowing growth and modest increase in tax revenue. Ideally, we should move towards a simple four-slab income tax structure with tax exemption up to Rs 5 lakh, 10 per cent tax for the slab Rs 5 to 10 lakh, 20 percent for the slab Rs 10 to 30 lakh and 35 percent for income exceeding Rs 30 lakh. This is unlikely this year; but exemption limit is likely to be raised to Rs 5 lakh. Some reduction of the rates for different slabs are likely, to provide relief. The concessions are likely to be confined to the new tax regime without tax exemptions.
Fiscal consolidation: A major achievement of the Modi government is its success in reducing fiscal deficit. Fiscal deficit, which spurted to 9.2 per cent in 2021 due to the unexpected increase in public expenditure caused by Covid, has been steadily brought down to 5.6 per cent in 2024. The fiscal deficit for 2025 is likely to be lower than the Budget estimate of 4.9 per cent. The government is likely to continue on the fiscal deficit reduction path and target a fiscal deficit of 4.5 per cent for 2026.
Stock market: The stock market is not expecting any concessions from the Budget this year. No changes are expected in securities transaction tax and taxation of dividend and capital gains. Market will be keenly watching for fiscal stimulus for growth, tax relief for the middle class and the fiscal deficit numbers.
Welfare spending: The flagship programs of the government like PM Awas Yojana, Ayushman Bharat, Har Ghar Jal scheme and PM Kisan Yojana will get higher allocation. The free food grain distribution scheme for which the allocation was Rs 2,02,520 crore in FY25 will need additional allocation for FY26.
Focus on novel spending: An area of concern is the government’s capital expenditure falling short of the target. Public capex has been lagging the budget estimates by 12.3 per cent by the end of November. Partly this is due to the election-related restrictions. Also, as far as the implementation is concerned, there are issues. Despite an allocation of Rs 11.11 lakh crore for capital expenditure in the 2024 budget, the money is not getting spent. Therefore, the budget may come up with novel projects where money can be efficiently spent. Urban infrastructure is a likely focus area for government capex.
-The author is Chief Investment Strategist at Geojit Financial Services Ltd.
