Union Finance Minister Nirmala Sitharaman.
The FY25 budget continues the commitment to being responsible. The fiscal deficit is projected at 4.9 per cent of GDP in FY25 and seeks a large 0.9 pp correction relative to FY24 (and a 0.2 pp lower deficit even compared to the interim budget) — a decline of 1.8 pp over the last four years. This would be the largest annual reduction in deficit since 2013, excluding the post-Covid normalisation. This is despite the skew towards capital spending in the budget (the capital to current ratio increasing from 18 per cent to a projected 30 per cent), with obvious multipliers. The Finance Minister also pointed to the plan to bring down the deficit further to 4.5 per cent in FY26, and emphasised the goal to bring sovereign debt on a declining path as a percentage of GDP. A modest nominal GDP growth and tax buoyancy also suggest prudence, giving room for upside surprises, and flexibility to deal with unknowns.
That said, is the consolidation envisaged in the near- and medium-term enough? Ultimately, what matters for macroeconomic stability and growth are the overall fiscal deficit and liabilities of the sovereign. The budget aims for restraint on borrowings of Central Public Sector Enterprises (flat at 1.1 per cent of GDP). Even excluding state PSEs, for which we do not have reliable estimates, the consolidated deficit is running at 8.8 per cent of GDP, and debt/GDP at 82 per cent. In FY24, the Centre is estimated to have spent close to 40 per cent of its revenues on servicing its debt burden. Notably, interest payments are budgeted at three-quarters of the fiscal deficit, while the primary deficit (deficit excluding interest payments) is projected at only 1.4 per cent of GDP in FY25. Deleveraging by the sovereign will be essential to convert the outlook upgrade by rating agencies into actual rating increase, which is long overdue. The budget clearly signals continued progress towards this goal.
The sustained push towards capital spending indicates consistency. The encouragement through Rs 1.5 lakh crore for capital spending as a 50-year interest-free loan is effectively a grant to states and should enable them to utilise these resources in critical areas like health and education. States, however, had not used such additional resources. Ironically, because states are unable to spend on capital outlays, it provides fiscal room to the Centre. As the Economic Survey correctly pointed out, the goal of Viksit Bharat can be achieved only through a collective compact, and states have to be an integral part of it.
The budget emphasised agriculture and MSMEs, sectors crucial for employment and for the low- and middle-income population. Apart from increased allocation to agriculture, the budget has focused on sustainability, whether through the promotion of pulses, climate-resilient varieties, or vegetable clusters. There was also a push for branding and certification to promote natural farming. While we can address the issue of value distribution through cooperatives, there is a need for value creation in agriculture, which has been recognised. The emphasis on safety and quality can be a springboard for agri-exports which the budget highlights. We know that only productive firms or farms succeed in exports. The mix of the push to productivity along with credible systems for quality, safety and health can be a major factor in scaling up success in agriculture.
Exports are not necessarily about selling to other countries — different states can export to each other, and there can be trade based on comparative advantage. We need to look at all possible trade links and the whole matrix of trade costs and the budget sends the right signals.
The Economic Survey 2023-24 indicated increases in demand and approval of credit guarantees under the CGTMSE scheme, which features credit pooling for MSMEs. The budget indicates further leveraging of the digital footprint of MSMEs in the economy, and enhanced credit assessment to help to cover enterprises without formal accounting systems. Doubling Mudra loan limits on the condition of successful repayment of previous loans is also welcome.
Digitisation also extends to land, a necessary area of reform for the China+1 goal. Unique identification of rural and urban land records is being introduced via the unique land parcel identification number (ULPIN), in addition to better map digitisation. This will allow for the quicker flow of agricultural credit.
What does the budget do for India’s commitment to the orderly transition to a Green Economy? The commitment to an enabling mechanism will allow for greater capital flows to climate adaptation and mitigation practices.
Does the budget sufficiently address the health and education sectors? The government has made education and skilling for employment a huge priority by allocating Rs 1.48 lakh crore. There are provisions for educational loans up to Rs 10 lakh for each student pursuing higher education in Indian institutions. India with her glorious past can be the university for the world, just as she has been the pharmacy of the world. Despite some encouraging steps, the overall budget allocation for both health and education remains minimal, and low by global standards.
Finally, the budget takes a step towards reducing inter-state disparities by allocating resources for “Viksit Bihar”, the state with the lowest per capita income. When India gained independence, an explicit government objective was to have a more egalitarian society, coupled with the balanced development of different regions. Active state intervention was envisaged to reduce disparities. The budget, through allocations for the poorer states, moves the needle in the right direction to fulfil this vision.
Overall, the budget strikes the right balance between responsible, inclusive, and sustainable growth.
Mishra is former Chief of Systemic Issues Division at the IMF and Professor of Economics at Ashoka University. Mukherjee and Nair are research associates at the Observer Research Foundation
