India Budget 2025

February 4, 2025 (6 min read)
India Budget 2025

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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