All Eyes On Budget 2025
The fiscal year is coming to an end, and it has been quite a rollercoaster ride for India's economy. We have faced numerous challenges, both domestically and internationally, that have tested our resilience.
However, we must not overlook the positive signs of growth in the service sector and the rise in high-value manufacturing exports.
Today, however, we are not here to discuss the ups and downs. Instead, let's focus on how the upcoming budget could shape the future of our economy.
A Glimpse into Budgeting in India
Indians have always been practical when it comes to managing their money and handling personal budgets and investments wisely. However, the concept of a national budget in India dates back to British rule.
It was the Scottish businessman James Wilson who made history by presenting the first Indian Budget on February 18, 1869. Yet, the foundation for India's budget had already been laid on April 7, 1860, two years after the East India Company handed over control to the British government.
Budgets before independence primarily focused on generating revenue for the British government.
However, after India gained independence, the focus of the budget shifted toward building the nation and improving the lives of its people.
The first Union Budget of independent India was presented by R.K. Shanmukham Chetty (first finance minister) on November 26, 1947.
Memorable Budgets in Indian History
Tomorrow, Finance Minister Nirmala Sitharaman will present the 79th Union Budget of independent India. Over the years, some budgets have truly stood out for their impact and innovation.
1973-74 (Black Budget): Presented by Yashwantrao B. Chavan, at that time India faced a huge fiscal deficit of ₹550 crore due to the financial strain from the Indo-Pak war and drought. This budget was crucial in addressing these challenges.
1986 (Carrot & Stick Budget): V.P. Singh introduced MODVAT (Modified Value Added Tax), which resulted in the simplification of the tax structure and the avoidance of dual taxation.
1991 (Epochal Budget): The most infamous budget of history presented by Manmohan Singh, this budget liberalized the economy by reducing import duties from over 300% to 50%, marking the end of the License Raj.
1997 (Dream Budget): P. Chidambaram lowered taxes for both people and businesses. He also introduced a new plan called the Voluntary Disclosure Scheme, which helped bring ₹10,000 crore into the government’s treasury.
2000-01: Yashwant Sinha's budget gave a big boost to the IT sector with major cuts in customs duty rates for computers. It also aimed to modernize industries like textiles, leather, and small-scale sectors.
2017-18: Arun Jaitley combined the Railway Budget (which was presented separately before this) with the Union Budget and moved the budget presentation to February 1st from the last working day of February, improving fiscal management.
Understanding the Budget Framework
Just like we handle money at home, the government manages a big budget for the whole country. This budget deals with how much money comes in, how it's spent, and how much is saved.
There are two main parts to this budget, that help the government plan and use its money wisely.
Revenue Budget:
Revenue Receipts: Revenue receipts are government recurring income. They are classified into tax revenue (such as direct taxes like income tax and corporate tax, and indirect taxes like GST and customs duty) and non-tax revenue (including profits from PSUs, fees for government services, fines, interest on loans, and grants).
Revenue Expenditure: Revenue expenditures are recurring expenses. They include developmental expenditures (on education, healthcare, and subsidies) and non-developmental expenditures (on salaries, pensions, interest payments, and defence)
A good revenue budget reduces income inequality by funding welfare programs and subsidies. It also helps maintain fiscal discipline and reduces non-viable borrowings.
Capital Budget:
Capital Receipts: Capital receipts refer to the non-recurring income. They include borrowings (such as loans from the public, foreign governments, and RBI) and asset sales or recoveries (like disinvestment and loan recoveries).
Capital Expenditure: Capital expenditure refers to non-recurring expenses. It includes infrastructure projects, equipment purchases, loan repayments, and investments in public enterprises, contributing to long-term economic growth.
A strong capital budget strengthens the economy by attracting private investments, boosting national income, promoting business growth, and creating jobs.
One crucial aspect to watch is the Fiscal Deficit,
This reflects the shortfall between government revenue and expenditure. If revenue falls short of expenses, the government has to borrow to bridge the gap.
A rising fiscal deficit often means the government is spending more than it earns, increasing the national debt. This can impact inflation, interest rates, and even economic growth in the long run.
Governments try to manage this gap by increasing tax collections, reducing unnecessary expenditures, or borrowing from domestic and international sources.
Budget Expectations
You’ve probably come across many budget predictions on social media, each giving a different view. Let’s take a look at these and talk about what changes this budget might bring.
Focus on the Growth of Capex
The budget is expected to focus on driving economic growth by increasing capital expenditure on infrastructure projects, including roads, water systems, metros, railways, defence, digital infrastructure, and green technologies. This will generate jobs and attract investment.
The government is expected to set aside ₹11-11.5 trillion for overall capex, which is a 15-17% increase from last year.
Support for the Rural Economy
Agricultural growth has hit a five-quarter high of 3.5%, due to a good monsoon that led to better crops and higher spending in rural areas. This has boosted demand in villages, but it still hasn’t fully returned to pre-COVID levels.
To support rural areas, the government is expected to continue providing food and fertilizer subsidies.
They may also increase investment in rural development, especially in affordable housing, to strengthen the overall economy.
Employment generation and skill development
The previous budget focused on creating more jobs and improving job skills, with programs that linked job opportunities to incentives and internships.
We expect the government to focus on the same and give it a boost. As per the Periodic Labour Survey, the work participation rate for men has gone up to 74.7% and for women to 25.2%. Also, the unemployment rate has been declining.
Enhancing India's Export Strategy
With Donald Trump back in office, global trade is expected to face some turbulence due to his administration's import tax policies. This could create challenges for Indian exports.
To tackle this, the Indian government may adjust tariffs, offer duty exemptions, and introduce schemes to lower export costs, aligning with its goal of reaching $2 trillion in exports by 2030.
Additionally, the government could streamline export regulations, making the process simpler and faster for businesses.
Fiscal Consolidation
The government is expected to focus on maintaining macroeconomic stability by following a fiscal consolidation path while ensuring a balance between growth and stability.
For FY25, the fiscal deficit is likely to be kept below 4.9%, with a target of reducing it further to 4.5% by FY26.
Possible Changes to Schemes in Budget 2025
Over the years, policies on taxation, subsidies, infrastructure, and welfare schemes have played an important role in shaping India’s economy. But with new challenges both in India and around the world, some of these policies may need to be improved, changed, or even stopped.
Let’s look at a few policies that the government might update or discontinue in the upcoming budget.
Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)
MGNREGS has been a crucial job provider for rural workers, especially during the COVID-19 crisis. However, its budget allocation has dropped from 2.1% in FY19 to 1.3% in FY24, leading to delayed wages and fewer job opportunities.
With the formation of the new coalition government, the scheme may be reconsidered by increasing funding, adjusting wages for inflation, and simplifying payment processes.
Production-Linked Incentive (PLI) Scheme
PLI schemes were launched in FY2020 to make India a manufacturing hub and reduce imports. With Budget 2025, the government may increase funding and expand PLI to more industries, especially those that create jobs.
However, only 10% of the ₹1.97 lakh crore PLI budget has been used so far. This may lead the government to focus on specific high-demand sectors instead of applying the same approach to all industries.
The scheme is likely to continue as it helps to boost local production and attract private investment.
Income Tax Policies
Citi and Jefferies have said that reducing income tax for people earning between ₹10 lakh and ₹20 lakh per year could encourage higher spending which may boost the economy.
Meanwhile, the Institute of Chartered Accountants of India (ICAI) has proposed a new system called joint taxation for married couples. This means that a husband and wife can combine their incomes and file taxes together as a single unit, similar to how it is done in countries like the United States and the United Kingdom.
If introduced in India, this system could help couples save money on taxes and simplify the tax filing process.
And with that, we wrap up this month’s case study! I’d love to know what you think about the budget, so feel free to drop your comments below.
And don’t forget to like, share, and restack
Song of the Week:
This is Parth Verma,
Signing off.
Good one sir
Great