This budget is remarkable for its fiscal restraint—apart from other aspects
- The revenue and primary deficit targets of the Union budget for 2025-26 are impressive indeed, so bond yields in India are likely to ease, while other eye-catchers like its tax giveaways would need monitoring.
The Union budget for 2025-26 is being hailed as a “thanksgiving’’ for the middle-class, while its personal income tax relief is being called “historic’’ and has hogged most of the limelight. But there a quite a few standout features other than these.
First things first. The remarkable and dogged focus on fiscal consolidation really is noteworthy. From a covid-high of 9.2% of gross domestic product (GDP) to 4.4%, the fiscal deficit is set to more than halve in just about six years. Importantly, in absolute terms, the fiscal deficit is likely to remain flat at ₹15.7 trillion in 2025-26, as compared to 2024-25, and lower than its level of ₹16.5 trillion in 2023-24.
While the fiscal deficit, which is a broader term that constitutes government spending as well as borrowing requirements, is the one that is under the spotlight, there are two other key measures.
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The revenue deficit, which measures the gap between total revenue and expenditure, is also slated to continue to fall in absolute terms from ₹7.6 trillion to ₹6.1 trillion in 2024-25 and further to ₹5.2 trillion in 2025-26. Likewise, the primary deficit, one of the most critical measures of fiscal health, as it measures the money borrowed to fund its current operating expenditure, continues to shrink—from ₹5.9 trillion to ₹4.3 trillion in 2024-25 and further to ₹2.9 trillion. This is extraordinary.
It has been made possible thanks to a persistent compression of expenditure, which is a tough ask in a noisy democracy with huge income and regional disparities. Revenue expenditure growth is budgeted at a muted sub-7% in 2024-25, lower than the capex growth of about 10%, with only a few welfare schemes witnessing a decent rise in allocation.
Note, revenue expenditure has trailed nominal GDP growth for a while and that also explains part of the consumption slowdown. A look at the fiscal mess in developed economies makes it amply clear how tough it is for large democracies to pare expenditure, especially the US, where curtailing expenditure amid ballooning debt is facing huge bipartisan challenges.
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Not surprisingly, the bond market continues to be the bigger beneficiary of fiscal discipline. Domestic bond yields are likely to ease in 2025-26 as the dated securities borrowings programme has been kept favourable. And a mix of market borrowings (including T-bills), the National Small Savings Fund and a few other instruments are being used to finance the fiscal gap.
Moderating domestic and global inflation will also help keep yields under control—again in contrast to developed markets, especially the US where yields surged by over 100 basis points even as the Federal Reserve pared rates by 100 basis points.
The persistent lowering of debt and moderation in yields is having a positive impact on the interest-rate burden of the government. The ratio of interest outgo as a percentage of revenue receipts is seen falling from a high of 39% in 2023-24 to 37% in 2025-26—again, in contrast with the US, where a rising rate burden continues to impinge on other crucial areas of spending.
The second part worth highlighting is the calculated bet on tax giveaways to boost consumption growth. The personal income tax multiplier is estimated to be around 1.01 in India. Moreover, its impact on consumption can be tricky and varied due to the difference in the propensity to consume and propensity to save among low-income households, as compared to higher income households.
The impact on households in higher tax slabs could be lower as a percentage of their income and they may have a higher propensity to save than to consume, as opposed to lower-income homes. Even if they consume more, we do not know how much of this will be spent on domestically-produced goods and services, as against consuming imported goods, say, or spending on activities such as foreign travel.
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Also, an attendant issue relates to the long term move towards raising the tax-to-GDP ratio. A continual rise in the income threshold for income-tax payment that reduces the base of taxpayers needs a holistic review. It creates tax mop-up pressure on regressive indirect taxes, such as the goods and services tax, that need to remain higher for longer. As estimated, the latest taxation move takes nearly 10 million people out of the income tax-paying net.
The other eye-catching measure in the budget is a rising emphasis on the role and involvement of states. Each infrastructure-related ministry has been tasked with coming up with a three-year pipeline of projects that can be implemented in public-private partnership (PPP) mode. States will also be encouraged to do so and can seek support to prepare PPP proposals.
There is also a move to develop 50-plus tourist destination sites in partnership with states. A national framework is also to be formulated as guidance to states for promoting Global Capability Centres in emerging tier two cities. Similarly, the government will set up an Urban Challenge Fund of ₹1 trillion to implement proposals for ‘Cities as Growth Hubs’, ‘Creative Redevelopment of Cities’ and ‘Water and Sanitation.’ All these will see states playing a much greater role in infrastructure and job-creating growth initiatives.
These are the author’s personal views.
The author is group chief economist at Larsen & Toubro.
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