The Indian Government presented their budget for FY 25-26. We analyse a few aspects of the budget and share our views on the same.
Economic growth
Economic growth for FY 24-25 is expected to be 6.4% excluding inflation. Retail inflation for FY 25 is expected to be at 5% which will take nominal GDP growth to 11.4%. What this means is that on an average, everyone’s income has increased by 11%. Since this is an average, you will have some people with higher growth and some with lower growth. The growth for FY 25-26 is estimated to be between 6-6.8% which is broadly similar to what it has been this year. The challenge continues as to how to push the same up to about 8%. The GDP for FY 26 is expected to be 3,56,97,923 crores.
Fiscal numbers
Indian macros are supposedly in good shape. The macros refer to fiscal deficit of the country and other numbers such as foreign exchange reserves, debt to GDP, current account deficit, external debt, etc. The broad numbers in the budget are as follows:
The total expenditure for FY 25-26 is expected to be Rs 50.65 lakh crores. Of this, Rs 11.21 lakh crores is capital expenditure. The revenue receipts are expected to be Rs 34.20 lakh crores. The Government actually spends more than it earns. It will cover this shortfall by borrowing Rs 15.68 lakh crores. The interest outgo on all debt is expected to be Rs 12.76 lakh crores in FY 26.
Though this amounts are high, compared to other countries these amounts seem decent. However, would we ever lend monies to a person whose expense is higher than their income. Would we ever lend monies to a company who has similar financial numbers like the Government? The only reason why banks, insurance companies and other investors continue to invest in securities issued by the Government is the power that they have to levy, raise and collect taxes from individuals and businesses.
Can we do better?
All the above financial numbers are expressed as a percentage of GDP. However, if we look at the numbers as a percentage of revenues, then they can look very different. The borrowing number is 46% of revenues. There is a lot of discussion on how these numbers are improving over the years. During covid, the borrowing of the Government had spiked and is now being gradually brought under control. Still we remain unsure as to how these numbers will look over the next 7-8 years. We need to question the efficiency of all expenditure. Is the money being spent wisely? We are spending 2.76 lakh crores on pensions, 4.91 lakh crores on defence, 3.82 lakh crores on subsidies related to fertilisers, food and petroleum, 2.33 lakh crores on home affairs, 1.28 lakh crores on education and 0.98 lakh crores on health. There are almost 150 odd schemes or projects. A review of all of these items needs to be conducted in detail to determine the need for so many schemes and projects.
The fiscal deficit and other numbers can be vastly improved by focussing on efficiency in expenditure. While there may have been steps made towards the same, there lies considerable scope for improvement. Given the rise in pension costs, it is surprising that the Government has chosen to revert to the old defined benefit scheme and move away from the defined contribution scheme. There are hardly any private sector employees who are eligible for defined benefit schemes and a good decision taken a few years ago to move away from the same has been reversed without any decent discussion on the same.
Can we improve capital efficiency?
Similarly, we have spend more than Rs 10 lakh crores on capital items last year. Can there be a review of the efficiency of the projects. Have they been completed? What is the return being earned on them? How have the assumptions turned out in reality? Can we use the same to make better investments in the future? If you look around, there is always a delay in the construction of roads, bridges, metro lines, etc. Futher, the quality of some of the construction is also not the best. Some numbers related to number of vehicles using the coastal road or the Atal Setu bridge are published. So also the number of riders on the metro lines. We need to understand how these numbers compare to the numbers assumed in the budget stage and what will be the impact of the same on the future profitability of these projects.
By focussing on efficient execution of both capes and revenue items, we can certainly reduce the deficit in a meaningful way.
Taxation
The Finance Minister eased tax rates under the new tax regime. This will considerably reduce the taxes paid by people earning salaries upto Rs 20 lakhs. If you earn an income upto Rs 12 lakhs, you will not pay any tax. If you earn Rs 20 lakhs, then you will end up paying Rs 2 lakhs as taxes which is an effective tax rate of 10%. A person earning an income of Rs 30 lakhs will pay a tax of Rs 4.8 lakhs which is an effective tax rate of 16%. This is considerable lower than the old tax regime where you end up paying a tax of 30% on all income above Rs ten lakhs. At Rs 30 lakhs income, the tax will be 7.125 lakhs and the effective tax rate will be 23.75%. Therefore, the new tax slabs are considerably lower than the earlier one. A new Tax Act is proposed to introduced shortly and it has been announced that the same will be simpler than the existing one which will make it easier to do business and also reduce litigation. This of course remains to be seen. We have always found the tax provisions to be complicated and tend to stay away from interpreting the same. Many people have made it their profession to help you comply with the same. Hopefully the new tax act will move to the new regime completely and make life easier for all of us. An attempt was made to introduce a new tax act in the past. The old Companies Act was also replaced a few years ago and there were many issues after the same was introduced. We can hope that the Government will discuss the same thoroughly with everyone and then introduce the same to ensure a smooth take off and landing.
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