The Budget is a statement of income and expenditure of the government just like the profit and loss of a company. But the thoughts that go into its formulation are important and spelled out in the Budget speech. Further, akin to a company’s balance sheet is the government’s liabilities schedule with debt statement being the critical component. While there may be limited flexibility in designing the Budget as almost all revenue components are contingent on the economy, governments do their best to provide incentives and support while drafting the document.
What can one expect from the Budget? These can be divided into three parts: macros, revenue, and expenditure. With macros, first priority is the fiscal deficit ratio target. The entire edifice is drawn up based on it, as there is a resolve to lower the ratio to 4.5% of GDP by FY26. With the revised deficit for FY25 expected to be 4.7-4.8%, a cut of 0.5% of GDP is likely this time.
Second is the assumed GDP growth rate. The first advance estimate for FY25 was relevant mainly to form the base for the Budget when targeting revenue numbers for FY26. The revised 9.8% for FY25, instead of 10.5%, will probably make the Budget take a conservative view of 10.5% for FY26. This will be the basis for calculating the tax revenue, normally taken as a proportion of this number. The ratio has been increasing in the last decade and a ratio of 12% can be expected this time.
On the revenue front, two areas need attention. The first is income tax rates. Past Budgets have sent a strong signal that ideally the government would like all individuals to move to the new tax system that has lower rates with no concessions. However, since consumption has been hit in FY24 and FY25 due to inflation, lowering tax rates could be considered. Providing relief only at the lower income levels may not lift aggregate consumption. This can be delivered in the new tax system by raising the tax slabs, including the basic exemption limit. Ideally these slabs should be adjusted with inflation. Such a cover will help protect real tax slabs.
Second, the tax rates across income streams may need a relook. All income is virtually taxed at slab rates. The exception is equity where long-term capital gains are taxed at 12.5% — the rationale is that it helps build confidence in the market leading to more investment. There is a strong reason to give similar benefits to bank deposits, as 18% of these funds are by statute invested in government securities and help finance the government borrowing programme. In FY25, there has been a migration of savings from banks to equity markets including mutual funds on this score. Both nominal and tax related returns are higher compared with deposits. So, declaring a lower tax rate on interest on all fixed deposits with maturity of above one year at, say 20%, could be a first step in narrowing the differential.
Third, given the evolving global conditions and the possible threat of dumping on the imports front, a detailed evaluation of all such steps should be done and a strategy drawn up to the counter them.
Fourth, a lower fiscal deficit ratio would mean the government’s gross borrowing programme would be stable in the range of Rs 14-15 lakh crore. An area that can be considered in light of the growing importance of climate issues is throwing open green bonds to retail with a tax-free incentive. This will address the issue of leaving more money in households for consumption.
On the expenditure side, while capex will be the primary tool to drive investment, diversification across ministries can be considered. In the last few Budgets which have witnessed spikes in capex, the three sectors that have benefitted are defence, roads, and railways. In particular, getting agriculture into the fold will help at a national level. Interlinking of rivers is a subject that demands urgency and cannot be carried out at the state level alone.
Second, the production-linked incentive scheme should be extended for micro, small and medium enterprises. Industries like auto parts, chemicals, textiles, handicrafts, etc. would benefit and are important components of the exports basket. For industry, the Centre could add an employment condition along with turnover. Last year, the government announced employment schemes involving payments made from the Budget for first-time employees, etc. By dovetailing the scheme with employment targets, the Budget can address the issue without straining finances.
Third, there can be a case for shifting social welfare spending to health and education. Budgets have concentrated on subsidies and cash transfers to vulnerable sections, improving living conditions. To make money work better by creating more social capital, the focus can also be on creating schools and hospitals as a joint venture with states.
A lot is expected from the Budget, in terms of measures to push for growth in consumption and investment. On the other hand, a more detailed look at the expenditure would be in order given that the government is well on the glide path of lowering the fiscal deficit ratio, to probably 3% in the next three-four years. That the economy is doing well is an advantage as no emergency measures are required and the focus can be on the medium term.
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