The Union Budget 2025 does appear to have the middle class in mind which will be the biggest beneficiary of these announcements. (Express file photo by Harmeet Sodhi)
Feb 1, 2025 20:45 IST First published on: Feb 1, 2025 at 16:29 IST
The Union Budget is a statement of accounts of the government, which says where money comes from and how it is spent. It is also the most potent policy instrument the government has as these numbers are drafted keeping in mind the larger goals of the economy in the areas of consumption, investment, inflation and interest rates. This year, two concerns were paramount: The first was consumption and the other was the government’s capex. In FY 25, there was a modicum of sluggishness in both. The budget has attempted to address both these issues from the fiscal side.
The budget has attempted to not just revive but also accelerate the processes. The income tax slabs have been moderated, which would result in Rs 1 lakh crore revenue being foregone. Intuitively, the amount in the hands of the taxpayers would be used for consumption and savings. Assuming that 70 per cent is spent, there can be expectations of higher spending by the salaried class. Typically, this would be spent on consumer goods and services. As services have been witnessing a sharp increase in recent times, it can be expected to accelerate.
Story continues below this ad
The other area is capex which has high multiplier effects on the economy. The focus areas are roads, railways and defence, which account for 63 per cent of the total capital expenditure — or 75 per cent, if transfers to states are excluded. The outlay for this year has almost been maintained at last year’s budgeted number of Rs 11.2 lakh crore. With a full year to operate, this time it may be expected that there will be no shortfall, which will help to speed up capex as well as bring in private investment. Industries like cement, steel and machinery are likely to benefit from these outlays.
The government’s capex has strong backward linkages in an indirect manner as it stimulates investment made by infrastructure industries which, in turn, employ more people. In other words, this process has a distinct connection with job creation. This will continue in FY26. The difference in approach to investment that has been spelt out in the budget is important — it focuses on the PPP model to push up capital formation. This is at the industry level — here all ministries would be involved — as well as in urban infrastructure.
The spending on social welfare deserves mention here. The government has been supporting the poor through schemes like PM-Kisan, NREGA, and PM Awas. These would continue to be focus areas. The free food scheme has received an outlay of Rs 2 lakh crore and the interests of the less privileged class have been addressed. The outlays provided in the budget will ensure that the safety net remains unaffected. This is important at a time when inflation is still a concern for all.
Story continues below this ad
Of late, budgets have tended to keep in mind the market impact as borrowings have increased sharply after the Covid pandemic, putting pressure on the markets as funding is an issue. However, ever since the government decided to roll back the deficits, albeit gradually, the gross borrowing programme has largely been range-bound. This has meant that the squeeze on liquidity has been limited. By bringing down the fiscal deficit ratio to 4.4 per cent for FY26, the budget continues on this path. This is good for the banking sector in particular given that there are challenges in garnering deposits. The bond markets will start off on a positive note on Monday as the fiscal numbers do indicate stable bond yields.
The budget has assumed a conservative GDP growth — 10.1 per cent. This would ensure that growth is not overstated and with attendant spinoffs on revenue collection. In other words, the possibility of a higher revenue collection cannot be ruled out. This also means that expenditure can be incurred without cutting corners.
most read
On the tax collections side, the buoyancy seen in income tax collections would continue this year. Revenues would rise by about 10 per cent, notwithstanding the concessions given in the budget. Corporate tax collection would increase by a similar amount which indicates that profits of companies would improve next year, which is good news.
On the whole, the Finance Minister has managed the budget quite dexterously given the limited space that was available since the objective of keeping to the agenda of lowering the fiscal deficit was paramount. It does appear to have the middle class in mind which will be the biggest beneficiary of these announcements. Funds have been channeled to areas which need attention as well as to areas where there would be growth multipliers (capex). More importantly, this has been done by ensuring that liquidity in the system is not affected which is a concern today given that the RBI regularly invokes enabling measures to ease the deficit.
Sabnavis is Chief Economist, Bank of Baroda and author of Corporate Quirks: The darker side of the sun. Views are personal
