Context: The Union Budget 2025 certainly included many positive aspects like Tax cuts meant for the middle class, growth and expenditure estimates rooted in reality, etc. However, deviating from laying out a clear plan for meeting fiscal deficit targets raises concerns on the government's approach for fiscal consolidation.
Relevance of the Topic:Prelims: Key trends in Budget- Positives and Concerns.
Positive Aspects of Budget 2025-26
- Reasonable Growth projection: Budget has projected a nominal GDP growth at 10.1% for 2025-26.
- Economic Survey 2024-25 had indicated a real GDP growth in the range of 6.3%-6.8% for 2025-26. This provides some buffer if growth picks up more.
- Concession for Middle class: Budget 2025 raised the basic exemption limit to Rs. 4 lakh and extended full tax rebate for income up to Rs. 12 lakh.
- Realistic assumptions for Tax Revenue growth:
- Gross tax revenue growth is projected at a lower level of 10.8%.
- There has been a fall in growth of Personal Income tax, from 25.4% in 2023-24 to 20.3% in 2024-25 (RE) and 14.4% in 2025-26 (BE).
- This fall in growth in 2025-26 (BE) is partly due to the announced income-tax concessions.
- In the case of corporate income-tax, the growth in 2024-25 (RE) is quite low at 7.6%. This growth has been raised to 10.4% in 2025-26 (BE).
- Non-Tax Revenues:
- Non-tax revenues have been raised from ₹5.3 lakh crore (RE) to ₹5.8 lakh crore in 2025-26 (BE).
- Addressing long-pending issues:
- Budget 2025 proposed to introduce a new Bill to repeal and replace the Income Tax Act, 1961.
- This is intended to make it simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.
Receipts in Budget 2025
- Total receipt:
- The total receipts other than borrowings are estimated at ₹34.96 lakh crore.
- The net tax receipts are estimated at ₹28.37 lakh crore.
- The fiscal deficit is estimated to be 4.4 per cent of GDP.
- Gross tax Revenues:
- Growth in Government’s gross tax revenues (GTR) have trended downwards in recent years.
- The buoyancy of GTR has fallen for three successive years from 1.4 in 2023-24 to 1.15 in 2024-25 (RE) and then to 1.07 in 2025-26 (BE).
- As a result, growth in the Government of India’s GTR has kept falling from 13.5% in 2023-24 to 11.2% in 2024-25 (RE), and to 10.8% in 2025-26 (BE).
- Falling growth rate of GST:
- Within the government’s tax revenues, the growth rate of Goods and Services Tax (GST) has also fallen from 12.7% in 2023-24 to 10.9% in 2025-26 (BE).
- Shift of focus from Indirect to Direct taxes:
- The structure of the government’s taxation has moved away from indirect to direct taxes.
- The share of direct taxes in the government’s GTR has increased from 52% in 2021-22 to 59% in 2025-26 (BE).
- Better performance of Personal Income Tax:
- Within direct taxes, it is personal income-tax which has performed better than corporate income-tax in terms of growth and buoyancy.
- Non-Tax Revenues:
- The main contribution has been in the form of dividends from the Reserve Bank of India and public sector companies, which together accounted for about ₹3.25 lakh crore in 2025-26. This is an increase of ₹35,715 crore over the revised estimates.
Expenditure in Budget 2025
- The total expenditure is estimated at ₹50.65 lakh crore.
- Reduction in Expenditure-GDP:
- Given the commitment to fiscal consolidation, the size of government expenditure as a percentage of GDP had to be reduced from 14.6% in 2024-25 (RE) to 14.2% in 2025-26 (BE).
- Growth in total expenditure, at 7.6% in 2025-26 (BE), is lower than the budgeted nominal GDP growth at 10.1%.
- Improvement in the quality of government expenditure:
- There has been a steady improvement in the quality of government expenditure as the share of capital expenditure in total expenditure has been improving.
- This share has improved by 10% points over the period from 2020-21 to 2025-26 (BE).
Concerns on Budget 2025
- Uncertainty over demand picking up: Impact of concessions given to middle class on demand depends on the marginal propensity to consume of the households.
- Case for AI infrastructure:
- Given the contemporary context, the Government has to build up large-scale Artificial Intelligence (AI) infrastructure in order to facilitate the adoption of emerging technologies.
- Global Comparison:
- In this context, China has taken a clear lead.
- The United States has recently announced an investment of $500 billion for AI infrastructure.
- In the field of AI, India’s technology companies have failed to anticipate developments.
- India should push these companies for research and development, by offering some tax concessions, if necessary.
- Less transparent fiscal health indicator:
- Budget 2025 moved away from fiscal deficit as an indicator of fiscal prudence.
- The practice of giving a glide path in terms of fiscal deficit is being discontinued.
- Budget 2025 stated that from now on, the focus will be on reducing the debt-GDP ratio annually.
- The glide paths are indicated in terms of alternative growth assumptions and alternative assumptions regarding mild, moderate, and high degrees of fiscal consolidation.
- This makes the whole exercise vague and non-transparent.
- Challenge of large-scale government borrowing: A larger claim on the available investible resources by the government will make it difficult for private investment to pick up.
Case of RBI’s Repo Rate cut
- The equity market has been on a downward trend for over four months, with major indices falling 10-13%, causing losses for retail investors, especially new entrants.
- The RBI in the latest Monetary Policy Committee (MPC) meetings has announced a 25 basis point rate cut in Repo rate, from 6.50% earlier to 6.25% now, to boost the market. Lowering interest rates would ease EMIs on home and consumer loans, providing relief.
Discontinuation of Sovereign Gold Bonds
- The government has decided to discontinue Sovereign Gold Bonds (SGBs), which began in 2015.
- The last issuance was in February 2023, with an outstanding amount of ₹4.5 lakh crore as of March 31, 2023.
- These bonds, with an 8-year tenor and interest of 2.75% (later reduced to 2.50%), provided returns indexed to 24-carat gold prices.
- Rise in Gold Prices: Due to the sharp rise in gold prices (3.25 times since 2015), the actual cost of issuing SGBs turned out to be 12-13%.
- This was much higher than the 6-8% cost of an 8-year government security (G-Sec).
- Unsustainability: In 2024-25, the government spent ₹18,500 crore on SGB redemptions, making the scheme financially unsustainable.
- Failure in reducing gold imports: SGBs failed to reduce the country’s reliance on physical gold imports, contrary to the government's expectations.
Government’s dependence on RBI Surplus
- The government continues to rely on surplus transfers from RBI, government-owned banks, and financial institutions.
- In 2025-26, the budgeted transfer is ₹2.56 trillion, up from ₹2.34 trillion in 2024-25.
- The share of these transfers in net tax receipts has doubled from 4.5% in 2023-24 to over 9% in 2024-25.
- This increase was driven by a sharp rise in the RBI’s surplus, largely due to exchange rate gains.
- While RBI normally transfers its earnings to the government, its recent high earnings stem from frequent interventions in the forex market.
- Such dependence on RBI's profits raises concerns about the central bank’s independence compared to global standards.