India’s budget for FY 25-26 may be perceived as a balancing act. While the increase in capital expenditure in the current budget has been similar to the budgets of previous years, there has been a shift to a more consumption-led path. This author, while analyzing the budget of 2022-23, (The Statesman, 4 April 2022), had noted that the underlying philosophy of that budget was “investment for growth”, interpreting thereby the Government of India’s actions in backing up its future plans for the economy with capital expenditure in sectoral allocations with an outlay of Rs 35 lakh crores which was a 35 per cent rise over that of the previous years, constituting 2.9 per cent of the GDP, the highest over the last twenty years.

Over fiscals 2023 to 2025, the Union government, however, has spent 5.4 per cent less than what was budgeted as capex allocations. Grants in aid for creation of capital assets was 15.6 per cent lower than budgeted during these three fiscals. Disappointments were reflected in lower expenditure in both the Pradhan Mantri Awas Yojanas (PMAY), Gramin as well as Sahari, as well as in the state apex loans falling short of their Rs 1.5 lakh crore target. In the backdrop of budgetary capex outlay falling short of target, it was the public sector undertakings which met targets, reflecting a RE of Rs 3.82 lakh crore as against BE of Rs 3.68 lakh crore, the IEBR led capex ac counting for 27.3 per cent of the total central apex in fiscal 2025.

Advertisement

Tardy infrastructure sector performance was also reflected in the performance of the Ministry of Finance, the Ministry of Defence and the Ministry of Communications, their budgetary capital outlay in fiscal 2025 reflecting rationalized revised estimates. In Ministry of Finance, RE has been estimated at Rs 1.58 lakh crore as against a BE of Rs 2.21 lakh crore; the RE in the Ministry of Defence has been estimated at Rs 1.60 lakh crores as against a BE of Rs 1.72 lakh crore and the Ministry of Communications estimates a RE of Rs 0.76 lakh crore as against a BE of Rs 0.86 lakh crore.

Similarly, in fiscal 25, while estimating Grant in Aid, RE for PMAY Gramin has been estimated at Rs 0.32 lakh crore as against the BE of Rs 0.55 lakh crore, for PMAY Sahari, the RE has been fitted at Rs 0.15 lakh crore as against an optimistic BE of Rs 0.30 lakh crore. While GIA for creation of capital assets is estimated at 42.4 per cent, revised estimates for government-supported affordable housing, namely the two PMAYs, are 45 per cent lower in the 25 budget estimates. Hence, following the sluggishness in capex-led budgetary outlays as well as the muted growth trajectory, and, in attempting to remain on the path of fiscal consolidation, capex growth in the economy is expected to expand at par with the GDP while maintaining its share at the same time.

The government has therefore maintained its capex support at Rs 11.21 lakh crore, which is 3.1 percent of the GDP, same as for fiscal 25. Effective capital expenditure through the budget has risen to 17.4 per cent, gross market borrowings are estimated at Rs 14.82 lakh crore and capital infusion has been raised to 5.5 per cent of the GDP. The main beneficiaries of the capital infusion would be the Ministry of Road Transport and Highways, the Ministry of Railways, the Ministry of Defence, the Ministry of Finance and the Ministry of Communications, accounting for about 87 per cent of the total budgetary capex. And, to maintain the capex support, the government has rationalised revenue expenditure to 11 per cent of the GDP.

The writing on the wall is therefore as follows: Firstly, contrary to assumptions underlying earlier budgets, there will be no reliance on growth through state investments. As persisting structural bottlenecks would only trigger inflation upon increasing public expenditure, the Centre is shy of leading via the public expenditure mode. Secondly, the government not being willing to lead revived expenditure, the onus to regenerate demand is on private consumption. To provide support to increased consumption, the government has provided a fillip to the middle class. Under the new tax regime, the exemption provided has been enhanced to Rs 12 lakh from Rs 7 lakh.

The standard deduction remains at Rs 75,000/. Tax slabs have been revised for those earning an income up to Rs 24,000. The government expects that the middle class, struggling with food inflation as well as high interest rates, would have more disposable income to spend on consumer items and repayment of household debts. In addition to encouraging consumer spending, the budget has also supplanted its support by nearly 23.7 per cent more allocation in welfare schemes mostly meant to assist the low income groups such as in the Pradhan Mantri Awas Yojana (PMAY), the Mah at ma Gandhi National Rural Employment Guarantee Act (MGNREGA), the Pradhan Mantri Gram Sarak Yojana (PMGSY) and the PM Kisan scheme.

With an aim to boost private sector capex, the government has initiated the Clean Technology initiative, which, supported by the Production linked incentive scheme, is expected to reduce reliance on import of EV batteries; proposed National Centres for Excellence in Skill Enhancement which are expected to improve labour productivity which is about 50 per cent lower than that of competing economies, and capitalised on the huge domestic consumer demand base to attract investments in the electronics and the pharmaceuticals sector, the triggers being rising export potential and increased job opportunities.

The government has also announced reduction of Basic Customs duties (BCD) on EV batteries and capital components in electronic items such as mobile phones, a decision that is expected to go a long way towards enhancing the competitiveness of the sectors. An 87 per cent rise in Production linked incentives (PLIs), intends to drive growth and to raise competitiveness of the sectors, especially electronics and textiles. The Government expects that capex will peak in the next fiscal, reducing reliance on import substitution and involving higher incentive payouts from the private sector. While the budgetary expenditure for infrastructure-led Ministries proposes a 11.6 per cent rise over RE 25, in state-led Infrastructure, states will be supported by a 50 year interest free loan outlay of Rs 1.5 lakh crore towards creating infrastructure and in generating incentives for reforms.

Next fiscal, the government has the discretion to play around with only Rs 1 lakh crore. In due recognition to the slowdown in growth which may have structural dimensions and macro-level constraints at various levels of the economy, the government, in moving away from its earlier budgetary strategies, has refrained from adopting a public expenditure-led economy which, in the absence of easing out structural bottlenecks, would only raise inflation and erode whatever extra is being made available with tax cuts towards consumption spending. A lot will hence depend on how consumers react to the tax relief and to the increased allocations in the welfare schemes and how the private sector responds to investment opportunities and employment generation in the background of the external headwinds and their effects on global supply chains.

Despite global challenges, India has maintained a steady estimated increase in real GDP of 6.4 per cent. In the next fiscal, India’s growth projections range from 6.3 to 6.8 per cent with some of the key drivers of growth expected to be a rise in rural demand, enhanced consumer confidence and rising corporate wages. Simultaneously, it is necessary to ease out the structural bottlenecks, to keep inflation under check and to manage the current account deficit. These factors would be crucial for maintaining sustained growth in the Indian economy.

(The writer, a retired IAS officer and former Secretary to the Government of India, is an Advisor to the United Nations)