Balancing Act or Missed Opportunity?

The Union Budget of the Indian Finance Minister, presented on February 1, has sadly grown into a routine yearly ritual. It has become an obligatory account of financial data with no proper commitment to address the key issues the economy faces. This year the Union Budget was presented at a time when changes in the geopolitical environment had badly hit the Indian economy.

During the last few months, the Indian currency constantly depreciated concerning the US dollar and there was unceasing volatility in the equity market due to the exit of foreign institutional investors (FII) who have withdrawn over ₹1.56 trillion from secondary markets since the beginning of October while investing ₹55,582 crore in primary markets. Some of the biggest foreign institutional investors (FIIs) in the Indian markets have pared their stakes in leading Indian companies during the December quarter when the portfolio was already taking a huge hit due to the plunge in stock prices from record levels of September. In terms of absolute value, the US-based EuroPacific Growth Fund saw the biggest hit with its stock holdings shrinking by ₹32,392 crore to ₹19,068.53 crore in the second quarter of the current fiscal. The US-based fund pared its stake in Reliance Industries, Cholamandalam Investment & Finance, and Godrej Consumer Products.

As of January 3, India’s foreign exchange reserves fell for the fifth consecutive week to a 10-month low of $634.59 billion and declined further to $629.560 billion on January 24. On January 23, the liquidity deficit - measured by the amount banks borrowed from the Reserve Bank of India (RBI) - was at ₹3.3 trillion, the highest ever. Indian banks were facing a significant liquidity crunch, with the credit-deposit ratio at 80%, the highest since 2015. This situation is exacerbated by tepid deposit growth, which lagged behind credit growth, leading to a rise in loan-to-deposit ratios. Crucial intervention by the RBI temporarily managed the liquidity deficit and brought it down to ₹2.2 trillion by January 30.

The new US president, Donald Trump, who returned to the Whitehouse on January 20, for the second time, has marked his return by brandishing trade measures against America’s neighbours and allies, including India, as well as its big rival China. In the past, he repeatedly branded India a “tariff king” and a “big abuser” of trade ties. India is not a significant player in global trade. Its share in global trade hovers around 2.1 per cent. Its overall balance of trade remains negative. India’s trade balance in 2024 is estimated to be a deficit of $210.77 billion. But with the USA it enjoys a trade surplus. In 2023-24, India had a trade surplus with the United States of $36.8 billion. This was a record high for bilateral trade between the two countries, which stood at $118.2 billion.

Lack of quality employment and rising poverty among the citizens were reflected in the sluggish consumption demand in the economy. An analysis done by C. A. Sethu, L. T. Abhinav Surya and C. A. Ruthu, using the Rangarajan Method, of the 2022–23 Household Consumption Expenditure Survey (HCES) reveals that a staggering 26.4% of Indians are below the poverty line – a gap of over 21 percentage points from the government’s claims. Earlier the CEO of NITI Aayog, claimed that the poverty headcount ratio had declined as low as 5% of the population. According to this analysis, 27.4% of the population in rural areas, where the cut-off is set at Rs 2,515 per capita per month, and 23.7% in urban areas, with a cut-off of Rs 3,639 per capita per month, is below the poverty line. This contrasts sharply with the government’s claims of near-eradication of poverty and raises questions about the accuracy and intent of its statistics. This contradiction stems from methodological differences. The contradiction between the government’s claims, based on the Tendulkar method (2009), and the findings of the Rangarajan method (2012) highlights the urgent need for a more honest appraisal of India’s poverty crisis. While official narratives celebrate progress, the reality for millions of Indians tells a different story, writes the Wire.

The Economic Survey which tries to capture the condition of the economy is normally released on the previous day of the presentation of the budget. This year also the document was released on January 31, on the very first day of the Budget session of the Parliament. Before analyzing the Union Budget 2025-26, let us first discuss the major challenges of the Indian economy as mentioned in the Economic Survey 2024-25.

Challenges flagged by the Economic Survey

• The Economic Survey has estimated real GDP growth between 6.3% and 6.8% in 2025-26. In 2024-25, India’s real GDP is estimated to grow by a 4-year low of 6.4%, reflecting weak manufacturing and investment performance. This marks a decline from last year’s growth forecast of 6.5-7% and the RBI’s estimate of 6.6%.
• Retail inflation decreased from 5.4% in 2023-24 to 4.9% in 2024-25 (April-December). This has been driven by a reduction in input prices of imported commodities. But India’s food inflation has remained firm. Food inflation increased from 7.5% in 2023-24 to 8.4% in 2024-25 (April-December), primarily driven by commodities such as vegetables and pulses.
• The current account deficit (CAD) deficit increased to USD 75 billion in the second quarter of 2024-25 from USD 65 billion in the corresponding quarter of 2023-24. To remain competitive and improve participation in global supply chains, India must continue to reduce trade costs and improve export competitiveness.
• The agriculture sector grew at 3.5% in the second quarter of 2024-25. Agricultural income has increased by 5.2% annually over the past decade as compared to 6.2% for non-agricultural income. Crop yields in India are considerably lower compared to other countries. This highlights the need for productivity improvements.
• The industrial sector grew by 6.2% in 2024-25, driven by robust growth in the electricity and construction sectors. Industrial growth declined to 3.6% in the second quarter of 2024-25 primarily due to a slowdown in manufacturing exports due to intensified trade competition and industrial policies of major trading nations. Gujarat, Maharashtra, Karnataka, and Tamil Nadu account for around 43% of the total industrial gross state value added. On the other hand, six northeastern states (excluding Sikkim and Assam) account for only 0.7% of the industrial gross value added.
• India lags in research and development (R&D) with a significant gap across major sectors. The current expenditure on R&D is only 0.64% of GDP which is insufficient and lower than many countries.
• The service sector’s contribution to total gross value added has increased from 51% in 2013-14 to about 55% in 2024-25. The Survey noted that there is a need for appropriate skilling of the labour force for sectoral growth.
• There is a need to accelerate infrastructure investment over the next 20 years to sustain a high growth rate. Private participation should accelerate in program and project planning, financing, construction, maintenance, and monetization.
• The annual unemployment rate for individuals aged 15 years and above has declined from 6% in 2017-18 to 3.2% in 2023-24 The proportion of self-employed workers increased from 52% in 2017-18 to 58% in 2023-24 reflecting growing entrepreneurial activity and preference for flexible working conditions. However, the share of workers in regular/salaried jobs has decreased from 23% to 22%. The Economic Survey admits real wages have not risen for 80% of workers in the last five years.
• India’s labour regulations impose extensive compliance requirements on businesses. Micromanaging regulations create unnecessary administrative burdens that hinder business growth.
• There is a need to focus on improving learning outcomes and employability by incorporating skills for new-age technologies such as artificial intelligence and machine learning. The Economic Survey found that over 53 per cent of graduates and 36 per cent of postgraduates are employed in roles below their educational qualifications.
• The Survey noted that there is a tendency for Indian firms to remain small. The reason for not scaling up is to remain outside the regulatory radar and steer clear of labour and safety laws. Deregulation is critical for MSMEs rather than large enterprises as the latter usually find a way around compliance. Regulations hurt the ability of businesses to start and grow over time and increase the cost of operational decisions.
• Indian firms cannot adhere to applicable regulations without hindering growth, investments, and job creation. For instance, exporting firms should have the flexibility to deploy more labour hours in months with a surge in orders. Faster economic growth would need central and state governments to implement reforms that allow small and medium enterprises to operate efficiently. Areas for deregulation include: (i) land, (ii) labor, (iii) transport, and (iv) logistics.

The major challenges flagged by the Economic Survey, among others, are: slower growth of GDP, high rate of food inflation, sluggish export, low agricultural productivity, declining and geographically uneven industrial growth, poor R & D, need for appropriate skilling in service sector, lack of government funds for infrastructural investment, decline in the share of salaried/ regular jobs. The Economic Survey (ES) has also made a few significant recommendations: the introduction of flexible working hours and labour regulations, the introduction of AI in the curriculum of higher education, and de-regulation in the MSME sector. ES has also suggested de-regulation in all the areas related to economic activities – namely, land, labour, transport and logistics.

Union Budget 2025-26

On February 1, the Finance Minister has proposed her 8th Union Budget for 2025-26. The salient features are:

• The government is estimated to spend ₹50,65,345 crore in 2025-26, 7.4% higher than the revised estimate of 2024-25. Interest payments account for 25% of the total expenditure, and 37% of revenue receipts.
• The receipts (other than borrowings) in 2025-26 are estimated to be ₹ 34,96,409 crore, about 11.1% higher than the revised estimate for 2024-25. Tax revenue which forms a major part of the receipts is also expected to increase by 11% over the revised estimate for 2024-25. Annual income of up to ₹ 12 lakh will receive a 100% rebate on the taxable income.
• Fiscal deficit in 2025-26 is targeted at 4.4% of GDP, lower than the revised estimate of 4.8% of GDP in 2024-25. To offset a drop in income tax revenues because of the cuts announced in the Union Budget, the Union government expects the RBI and public-owned financial institutions to increase their output by 9 per cent in the coming fiscal year. Transfers from the RBI and government-owned banks are estimated to increase to $29.6 billion ( ₹2.56 trillion) in the fiscal year that starts in April, reported Bloomberg.
• The Union government aims to reduce its outstanding liabilities to around 50% of GDP by March 2031. In 2025- 26, outstanding liabilities are estimated to be 56.1% of the GDP.
• The FDI limit for the insurance sector will be increased from 74% to 100% for companies that invest their entire premium in India. A new income tax bill will be introduced.
• A high-level committee for regulatory reforms will be set up to review all non-financial sector regulations, certifications, licenses, and permissions.
• To improve credit access, credit guarantee cover will be increased: (i) from five crore rupees to ₹10 crores for micro and small enterprises, (ii) from ₹10 crores to ₹ 20 crores for start-ups, and (iii) up to ₹20 crores for exporter MSMEs. Investment and turnover limits for the classification of MSMEs will be at least doubled. For micro enterprises registered on the Udyam portal, 10 lakh credit cards with a credit limit of ₹ 5 lakh will be provided within the first year of the scheme.
• Each infrastructure-related ministry will formulate a three-year pipeline of projects that can be implemented in public-private partnership mode. A second asset monetization plan will be launched for 2025-30. National Geospatial Mission will be started to modernize land records and urban planning. India Post will be transformed as a large public logistics organization and will be repositioned to provide several services in rural areas
• Broadband connectivity will be provided to all government secondary schools and primary health centers in rural areas.
• In 2025-26, the top 13 ministries in terms of allocations account for 53% of the estimated total expenditure. Of these, the Ministry of Defence has the highest allocation in 2025-26, at ₹ 6,81,210 crore, accounting for 13.4% of the total budgeted expenditure of the central government. Other ministries with high allocations include: (i) Road Transport and Highways (5.7% of total expenditure), (ii) Railways (5.0%), and (iii) Consumer Affairs, Food, and Public Distribution (4.3%). Ministry of Education has been allocated ₹1,28,650. Ministry of Health and Family Welfare received an allocation of ₹ 99,859. The combined budget of Health and Education is ₹228509 which is 33.54% of defence allocation.
• In 2025-26, the total expenditure on subsidies is estimated to be ₹4,26,216 crore, similar to the revised estimate for 2024-25. Food subsidy estimated at ₹2,03,420 crore and fertilizer subsidy at ₹ 1,67,887 crore in 2025-26 together constitute 87% of the total subsidy bill. LPG subsidy constitutes 3% of the total subsidy bill. Food subsidy has been increased by only 3% against the RE of 2024-25. Fertilizer and LPF subsidies have been reduced by 2% and 17.7 % respectively.
• Among the major projects, MGNREGS has the highest allocation in 2025-26 at ₹ 86,000 crore. This amount is the same as the revised estimate for 2024-25. The allocation for PM Kisan at ₹ 63,500 crore is also unchanged. In 2024-25, expenditure for the Pradhan Mantri Awas Yojana is expected to be lower by 44% as compared to the budget estimate of ₹30,171.

Observation

On February 7, one week after the submission of the Union Budget, the Reserve Bank of India, under the new governor, Sanjay Malhotra, announced a repo rate cut of 25 basis points to 6.25% for the first time in nearly five years. It is expected that the reduction in repo rates is expected to provide relief to existing homebuyers as it helps lower their equated monthly instalments on home loans and ignite overall home-buying sentiment. The rate decision comes soon after the government slashed personal tax rates in Budget 2025 to boost spending by middle-income groups to stimulate growth. However, it is argued that rate cuts may be less effective by raising property prices if inflation remains as high as it is now. Also, it remains to be seen if banks pass on the full benefit to borrowers promptly and without a glitch.

To appease the US president and safeguard the interest of US exporters, India has already reduced, in the Budget, average import tariff rates to 11% from 13% on several items imported from the USA. Reuters reports that India plans to review import tariffs on over 30 items, including luxury cars, solar cells, and chemicals, a senior finance ministry official said, potentially leading to increased imports from the United States as global trade tensions grow. The move, aimed at reducing average tariffs, comes ahead of Prime Minister Narendra Modi’s visit to the U.S. next week. In addition to this, Indian Defence Minister Rajnath Singh held the first telephonic conversation with the new U.S. Secretary of Defence Pete Hegseth on Thursday (February 6, 2025) during which the two leaders “agreed to work together to draft a comprehensive framework on defence cooperation, aimed at structuring the bilateral collaboration for 2025-2035”, reports the Hindu.

According to the Economic Survey, self-employed workers constitute 58.4 per cent of the workforce in 2023-24. Though the Union government celebrates this stating that this shift reflects growing entrepreneurial activity and a preference for flexible work arrangements, in developing countries like India, a high level of self-employment is an indicator that there are no other alternatives; the people, therefore, stick to these non-rewarding jobs.

To date, no serious policy announcement has been made by the government to address the 26.4% of Indians who are somehow surviving below the poverty line. Allocation for MGNRES in 2025-26 has declined from the 2023-24 budgeted allocation of ₹89,154 and there is no increase in the allocation of funds for PM Kisan. Subsidy on food in 2025-26 has been decreased from 2023-24 subsidy amount of ₹2,11,814.

Views expressed are personal