Mint Primer | Finance minister Nirmala Sitharaman's eighth budget in eight points

Union finance minister Nirmala Sitharaman addresses a post-budget press conference in New Delhi on Saturday. (ANI)
Union finance minister Nirmala Sitharaman addresses a post-budget press conference in New Delhi on Saturday. (ANI)

Summary

  • In her eighth budget, Nirmala Sitharaman strikes a delicate balance between stimulating growth and staying true to fiscal consolidation, aiming for a sustainable economic future amid global uncertainty.

Nirmala Sitharaman had an unenviable task of boosting economic growth without compromising the fiscal consolidation efforts of the government when she presented her record eighth consecutive budget on Saturday. The finance minister has tried to balance the two conflicting objectives. This is how she managed to pull it off:

1. A mini bazooka

Faced with a sharp fall in urban consumption which dragged economic growth down in the second quarter of this fiscal to just 5.4% of the gross domestic product (GDP) compared to 8.2% in the same period last year, the finance minister had to act, and she decided to take the bull by its horns. 

She cut personal income tax sharply to leave as much as ₹1 trillion in the hands of the people in the hope that people will spend, thereby boosting consumption and eventually, GDP growth. Consumption, according to the Economic Survey, accounts for 62% of the GDP.

Read this | Budget 2025 | A ₹1 trillion largesse for India's middle class

2. Fiscal commitment

While presenting the 2021-22 budget, the finance minister had committed to reducing the fiscal deficit—then at 9.2% levels—as a share of GDP to 4.5% or below by 2025-26. By pegging FY26 fiscal deficit at 4.4%, she has kept her word. In FY25, the government achieved a fiscal deficit of 4.8%, lower than the budgeted 4.9%, thanks to buoyant tax collection and lower than expected capex spending. 

Read this | Budget 2025 math: How the government plans to cut fiscal deficit this year

From FY27, the government has said that fiscal consolidation will be anchored around debt and not fiscal deficit. The finance minister, giving a glide path of debt reduction, has said that Centre’s debt to GDP will be 50% plus or minus 1% by March 2031.

3. Infra spend

The government has continued its thrust on capital expenditure (capex) but in a more pragmatic manner. Over the last few years, it could not consume the budget allocation in full. In FY25, the shortfall will be 8% of the allocation. 

Considering the challenges in absorption of capex, it has maintained the allocation at ₹11.21 trillion in FY26. The allocation for the 50-year interest-free capex loans given to the states to get them to push capex has also been retained at ₹1.5 trillion. To increase the absorption capacity, the government is pushing for public-private partnership in a big way.

4. Private investment

India Inc. has not got much by way of sops in the 2025-26 budget. But the stimulus and the sharp rise in consumption that it should drive will go a long way in increasing demand and consequently, companies’ capacity utilization. That should be enough incentive for them to start investing again. 

They have de-leveraged their balance sheet taking advantage of the corporate tax cuts announced by the government in September 2019. The banking sector, having overcome the challenges of bad debts, is primed to lend. Will they bite the bullet and invest?

5. Light-touch regulation

What might benefit businesses in a big way is the government’s deregulation plan. It plans to put in place ‘a light-touch regulatory framework based on principles and trust’, in a bid to unleash productivity and employment. To achieve this, it is setting up a high-level committee to review all non-financial sector regulations, certifications, permissions and licences. 

An investment-friendliness index will be launched for the states to compete on. Through the Jan Vishwas Act 2023, more than 180 legal provisions were decriminalized. The government now hopes to bring an updated version of the law to decriminalize another 100 provisions in various laws.

6. More jobs

A sustained growth in consumption will not be possible unless more jobs are created. This is also required to benefit from the demographic dividend that India enjoys. As much as 75% of the non-agriculture jobs are created in the informal sector. It is for this reason that the government has continued to focus on the micro, small and medium enterprises (MSMEs) in a big way.

It has enhanced the credit guarantee cover for MSMEs significantly from ₹5 crore to ₹10 crore. This will offer them additional credit to the tune of ₹1.5 trillion over the next five years. Also, to help them achieve higher efficiencies of scale and technological upgradation, the investment and turnover limits for classification of all MSMEs will be enhanced to 2.5 and 2 times, respectively.

7. Debt fire power

That is a stiff target to meet, considering that the central government’s debt to GDP ratio in FY25 is estimated to be 57.1%. Economists have repeatedly said that a lower debt level will give India the headroom to fight any major crisis. They have pointed out that India was able to weather the pandemic much better than other countries because it had lower government debt. Pre-covid, it was 49% (2018-19). Combined debt of both Centre and states is estimated to be 85.3% of the GDP in FY25.

8. Flat reaction

The stock markets ended flat after an initial panic triggered by higher market borrowings and lower than expected capex outlay. It then recovered after income tax rate cuts were announced. 

Also read | Markets sulk on capex blues, consumption stocks gain

The Sensex which opened at 77,637 closed the day at 77,506 points. The biggest gainers were the FMCG and auto manufacturers who are expected to benefit from the stimulus. That the budget had no major direct sops could be attributed for the markets’ subtle reaction to the budget.

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