Income tax cheer hides a shrunk Budget—uncovered in 8 charts

India cut its fiscal deficit target for this financial year and the next, but by shrinking the budget.
India cut its fiscal deficit target for this financial year and the next, but by shrinking the budget.

Summary

  • The government announced a massive income tax relief in a bid to stimulate consumption in the economy, while also staying true to its fiscal consolidation promises. This, however, has come at the expense of key social sectors. Mint explains:

An angry middle class, a slowing economy and an election setback finally led to an income tax bazooka from Finance Minister Nirmala Sitharaman, a move economists and policymakers strongly argued was the need of the hour. But beyond the headline-grabbing income tax cuts, the government delivered a smaller budget, barely increasing allocations for several key ministries.

This has kept the government from veering off its fiscal consolidation path.

The Centre cut its fiscal deficit aim to 4.4% of GDP for 2025-26 from 4.8% expected in the current financial year, keeping its 2021-22 promise of bringing it down to below 4.5%. But this feat has been achieved by shrinking the budget year after year. Since 2021-22, the Centre has increased its receipts as a percentage of GDP by only 40 basis points (bps), while it has cut the fiscal deficit by 230 bps. This has come on the back of a 190-bps decline in expenditure as a share of GDP, with capital spending also taking a backseat this year.

Capital expenditure, which emerged as a holy grail for supporting growth after the pandemic, seems to have reached its saturation point as the Centre kept it steady at 3.1% of GDP. The government became less optimistic about the capex after setting an ambitious target of 3.4% of GDP for 2024-25, which will now be missed by 30 bps. Despite the Centre pushing capex up sharply in the past few years in a bid to revive the economy, the growth started slowing down as five years of high inflation and low wage growth eroded people’s purchasing power, resulting in a consumption slowdown.

The trade-off

It was hoped that the Centre’s own capex push in recent years would be followed by private sector capex and a multiplier effect on growth. But as this failed to materialize in full force, the priority seems to have moved towards reviving growth by putting money in the hands of the people. 

Since the government managed a massive revenue mobilization through income tax, beating its budgeted estimates for four years straight, an income tax cut was not going to put it in a tough spot. In fact, despite the cut, income tax collection growth is estimated to exceed the growth in corporate and goods and services tax (GST) collections. An expected windfall revenue from the Reserve Bank of India (RBI) as part of dividends and profits boosted the government’s ability to deliver massive tax cuts.

However, many key sectors were left wanting. The allocation for key rural and agriculture schemes was largely unchanged, including the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and PM-Kisan, the income benefit scheme for farmers. Overall spending on key social sectors has been a declining trend. 

The outlay for education has been increased to 1.29 trillion for 2025-26 from a revised spending estimate of 1.14 trillion in the current financial year. The rise may look sharp, but the 2024-25 revised estimate is on its way to miss the initial outlay of 1.26 trillion. With strained resources, the Centre touched up on the needs of farmers and micro, small and medium enterprises through enhanced credit availability.

 

Growth dynamics

Even in the wake of a slowing economy, with GDP growth expected to be less than 7% for the second consecutive year in 2025-26, the government has also delivered on its promise of targeting fiscal deficit in a way that also brings debt down. The fiscal discipline has been taken well by stakeholders, and policymakers, and even makes the job of RBI easier on the monetary policy front. 

However, the government’s capex efforts have not put the Indian economy on a high growth path yet. If India has to achieve its dream of becoming a developed nation, its economy will have to grow at 8% for the next two decades, according to the Economic Survey of India, presented on Friday.

On one hand, the Budget offers to push money into people’s hands to boost consumption, and on the other, by striking a fiscal balance, it has opened ways for the RBI to start easing monetary policy next week, which could also prove supportive to growth in the upcoming financial year. However, India is still a long way from achieving an 8% growth rate on a sustainable basis, which may not be possible without sustained and proper investment in its social sectors such as health, education, agriculture and rural economy.

While the government has made the “middle class" and fiscal watchers happy, striking a fiscal balance through spending cuts as opposed to revenue mobilization could come with its own problems in the long run.

Charts by howindialives.com, Payal Bhattacharya, Manjul Paul, Shuja Asrar, Nandita Venkatesan

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