Sitharaman’s response

If you are a BJP supporter, it is difficult to pick something to criticise in Finance Minister Nirmala Sitharaman’s eighth Budget. Indeed, as far as optics go, she has managed to tick most of the boxes – keeping the fiscal deficit on a scheduled glide path, maintaining capital expenditure to propel growth, providing income tax relief to the long-suffering middle class while simultaneously boosting consumption, and throwing in a few reform proposals.

Yet, is all this enough to reverse the slowing economy? Or to meet the challenges of our times?

The Budget was presented against a backdrop of global geopolitical and economic uncertainty caused by Donald Trump’s return to the office of President of the United States (POTUS), particularly his threat of “punitive” tariffs to make America’s trading partners fall in line. Trump’s disruptive policies are aimed at fuelling his MAGA (Make America Great Again) movement, which calls for strict limits on immigration and a return to pre-globalisation policies and practices. Meanwhile, in the age of AI, China is flexing its muscles with DeepSeek, its cheaper, more efficient answer to America’s ChatGPT, creating ripples. What does India need to do to catch up with these powers in Industrial Revolution 4.0?

Budget 2025 was supposed to provide some answers.

In a pre-emptive move designed to further smooth the entry of Harley-Davidsons into India – and, New Delhi hopes, ward off any threat of US tariffs – the Budget slashed import duties on motorcycles, cutting tariffs on heavyweight bikes with engines above 1,600cc from 50 per cent to 30 per cent and smaller ones from 50 per cent to 40 per cent. During his first term, Trump had fixated on India’s steep tariffs. He repeatedly slammed the then 100 per cent duty on Harleys as “unacceptable”, making it a rallying point in his crusade against what he saw as unfair trade practices. But will the tariff cuts satisfy Trump, or is trade action still on the table?

In their phone conversation late last month, the US President pressed Prime Minister Modi to buy more US arms and ensure a fairer trade balance, maintaining diplomatic pressure. India enjoys a trade surplus with the US, its top trading partner. Bilateral trade crossed $190bn (£150bn) in 2023. Merchandise exports to the US have surged 40 per cent to $123bn since 2018, while services trade grew 22 per cent to reach $66bn. Meanwhile, US exports to India stood at $70bn. Beyond bikes, India has zeroed out import taxes on satellite ground installations, benefiting US exporters who supplied $92m worth of these in 2023.

Multiple themes

As always, the Budget has multiple themes and highlights. This Budget marks a significant shift in strategy by the government – from capex-driven growth to a consumption-driven one. Whether this is a tactical change or a shift in philosophy remains to be seen. The finance minister has not only raised the tax rebate threshold to Rs12 lakh per annum (excluding capital gains, etc) but also reordered the slabs and rates, so the highest tax rate of 30 per cent will now apply only to income above Rs24 lakh, compared to Rs20 lakh before. These changes are projected to put between Rs80,000 (for an income of Rs12 lakh) and Rs1,10,000 (for an income of Rs25 lakh) in the hands of taxpayers per annum. As many as one crore taxpayers are expected to benefit from the change in rebate.

Understandably, the direct tax concessions announced at the very end of the Budget speech have grabbed much of the attention. But are the income tax sops enough to drive consumption? The income tax concessions to the middle class “seem aimed at addressing the slump in urban consumption”, says Aurodeep Nandi, Nomura’s India Economist.

The impact, however, could be limited since only a tiny fraction of Indians pay direct taxes. In 2023, just 1.6 per cent of Indians (22.4 million people) actually paid income tax, according to data presented in Parliament.

Neelkanth Mishra, Chief Economist at Axis Bank, believes that while tax cuts will likely benefit certain high-income segments, their impact on broader consumption may not be significant.

Mishra, who is a part-time member of the Prime Minister’s Economic Advisory Council, part-time Chairman of UIDAI (Aadhaar), and a part-time member of the Telecom Regulatory Authority of India (TRAI), says that what really matters from a market perspective is how the 70-75 lakh people earning between Rs12 lakh and R50 lakh, who are the biggest beneficiaries of these tax cuts, will use their discretionary income. That’s where the impact will be seen.

According to him, this group tends to move beyond spending on basic goods and staples to luxury items, discretionary purchases, and financial savings. “For these individuals, a reasonable part of the extra disposable income will actually be leveraged,” Mishra noted, explaining how the increased income would flow into auto loans, mortgages, and other high-value purchases.

Mishra believes that of the Rs1 lakh crore given away through tax breaks, the government expects to get back about a third in the form of indirect tax collections as people spend. “So, this Rs70,000 crore that is left after the 30 per cent of savings would then get multiplied, because this will be used in a leveraged way,” he emphasised, referring to the multiplier effect that these purchases could have on sectors like real estate and jewellery. “While it’s not considered part of household consumption expenditure, the real estate market (real estate is considered investment, not consumption) will likely benefit,” Mishra said.

Makhana-nomics

The income tax breaks Sitharaman has announced are clearly aimed at the middle class, which was becoming somewhat disenchanted with the Modi magic. The timing is important – less than a week before the election in Delhi, where the BJP is making a concerted bid to oust Arvind Kejriwal’s Aam Aadmi Party.

Sitharaman also used the Budget to announce the setting up of a “Makhana Board” in Bihar to improve production, processing, value addition, and marketing of makhana. The Board will provide hand-holding and training support to makhana (fox nut) farmers and will also work to ensure they receive the benefits of all relevant government schemes.

In recent years, the once humble makhana has skyrocketed in popularity worldwide as a ‘superfood’ of choice among fitness enthusiasts. This has prompted the government to focus on marketing makhana to commercially harness its popularity. In 2022, ‘Mithila Makhana’ was conferred a Geographical Indication (GI) tag, a certification that signifies that a product can only be grown in a particular geographical location and, as a result, has unique characteristics (like Darjeeling tea or Mysore sandalwood soap).

A new National Institute of Food Technology, greenfield airports, and support for an irrigation project in the Mithilanchal region are among the benefits announced for Bihar, where elections are due later this year.

The move has led critics to snidely remark that the Budget is all about ‘Makhana-nomics’. Considering that the Economic Survey presented a day before the Budget had made a compelling case for a big push on deregulation and liberalisation, the Budget is something of a damp squib.

Sprinkling of reforms

Sure, Sitharaman’s budget has a sprinkling of financial sector reforms to ease compliance, expand services, build a robust regulatory environment, promote international and domestic investment, and effect decriminalisation of archaic legal provisions. But where is the 1991 moment that her supporters were rooting for?

In defence, her supporters say that the FM had a difficult puzzle to crack. But she managed to find the secret code by deftly balancing conflicting demands. The fiscal deficit target of 4.4 per cent of GDP for 2025-26 (the gap between what the government will earn and spend) was sacrosanct. But consumption needed a leg-up, and the middle class was restive, feeling the pinch of food inflation and near-stagnant salaries for the better part of the year. She had to find the money for a tax giveaway and managed that by maintaining capex spending at about the same level as last year, at Rs11.21-lakh crore. A higher capex allocation was sacrificed in favour of a tax break for the middle class.

Officials concede that the government’s capacity to push capital spending in 2024-25 ran into a wall because of the model code of conduct, which came into play in the run-up to the general elections. Of course, if you consider the revised estimate of Rs10.18-lakh crore for 2024-25, the capex allocation for 2025-26 is actually a 10 per cent rise.

As for reforms, there are measures like the allocation of Rs500 crore for an AI centre of excellence and the implementation of digital infrastructure for global trade finance. This is for technological advancement in the Banking, Financial Services and Insurance (BFSI) sector. She has also promised a light-touch regulatory framework based on principles and trust to ensure productivity and employment. A High-Level Committee for Regulatory Reforms would be set up to review all non-financial sector regulations, certifications, licences, and permissions. This committee will suggest measures within a year to strengthen trust-based economic governance and take transformational steps to enhance the ‘ease of doing business’, especially in matters of inspections and compliance. State governments would be asked to implement the recommendations at their regulatory authorities for the benefit of the general public.

Sitharaman also announced that an Investment Friendliness Index of States would be launched in 2025 to further the “spirit of competitive cooperative federalism”. Besides, she proposed to establish a mechanism under the Financial Stability and Development Council (FSDC) to evaluate the impact of current financial regulations and subsidiary instructions and formulate a framework to enhance their responsiveness and the development of the financial sector.

To decriminalise more than 100 provisions in various laws, a Jan Vishwas Bill 2.0 will be tabled in Parliament shortly.

Impact and reality

Commenting on the likely impact of the Budget on the BFSI sector, Varun Khullar, head (BFSI), LeadSquared, which provides automation tools to BFSI firms, said: “The Budget represents a pivotal development for the BFSI sector, demonstrating India’s dedication to technological advancements and broader financial access.” He said such measures would create the foundation for improved operational efficiency, enhanced security, and greater financial accessibility.

Commenting on the focus on the Nyaya Samhita and the Jan Vishwas 2.0 Bill, Ajay Bhargava, Partner, Khaitan & Co, said: “This marks a significant step towards simplifying India’s legal framework”, adding: “By decriminalising over 100 provisions in existing laws, the government is simplifying legal processes, reducing burden, and fostering ease of doing business in the country. This reform aligns with the broader objective of making laws more accessible and relevant, promoting economic growth while alleviating complexities that hinder operations, particularly for MSMEs.”

The reform proposals may have elicited a positive response, but remember, this is a dispensation which rolled back two major reforms on land and farming in two successive terms.

Conservatism is key

Sajjid Chinoy, Head of Asia Economic Research at JPMorgan, says the key theme of the Budget is conservatism, meaning the government has taken a cautious approach. The fiscal deficit targets are in line with what was anticipated, with the deficit expected to drop from 4.8 per cent to 4.4 per cent. The projected nominal gross domestic product (GDP) growth for this year is conservatively set at 10.1 per cent, following a lower growth rate from last year. Additionally, capex is in line with nominal GDP growth, continuing a trend from previous budgets.

He also touched on the issue of tax buoyancy, which refers to how well tax revenues are expected to grow. After accounting for the revenue losses from tax cuts, the Budget assumes a tax buoyancy of 1.3, meaning tax revenues should increase at that rate. In comparison, this year, the tax buoyancy was around 1.1. While there were no major surprises in the fiscal math, Chinoy noted that it would be interesting to see if the government can meet the higher tax buoyancy expectations.

Budget math

The projections for revenue and expenditure are largely believable, though it is possible to raise a question mark over the 14.40 per cent increase assumed in personal income tax revenue at Rs14.38-lakh crore.

Of course, the increase is well below the actual growth in 2023-24 and in the immediate past years. But together with the 10.40 per cent growth assumed for corporate tax in 2025-26 (actual growth of 7.56 per cent in 2024-25 over 2023-24), this may well be the weakest link in the Budget arithmetic.

Corporate profit growth is slowing. But then, there is the ‘X’ factor in dividend receipts from the central bank and PSUs/PSBs, assumed at Rs3.25-lakh crore. There is reason to believe that it may overshoot the estimate, considering the RBI’s vigorous market interventions to support the rupee by selling dollars, which fetches a handsome premium given the low holding cost.

As for other reforms, the FDI limit in insurance will now be 100 per cent (previously 74 per cent); there is the promise of a new Income Tax Bill to be introduced shortly “that will be clear and direct in text with close to half of the present law”; a second round of asset monetisation that will raise R10-lakh crore in 2025-30; rationalisation of TDS/TCS; and the promise of a high-level committee on regulatory reforms.

Till that happens, Sitharaman’s latest Budget remains another largely bureaucratic response to what is required in the current context of growth slowdown and global uncertainties, with some deft balancing of resources and redirection of priorities