THE finance minister presented the budget for the FY 2025-26 in the context of a slowing down of growth, rising inequality, lack of private investment together with declining growth of government investment, depleting foreign exchange reserves and declining growth of exports. The growth of consumption expenditure continues to be low as real wage and earnings are eroded due to episodes of high food inflation. The major problem of the economy seems to be weak demand, which is primarily because, as the Economic Survey notes, of the wages of workers not reaching the pre-pandemic levels even today. True that unemployment rate has fallen in the recent years but a vast mass of population although being employed earns a wage below subsistence levels. On the other hand, profits of corporates have soared to fifteen-year peak as the Survey notes but that did not kindle the ‘animal spirits’ for investment. This points to a peculiar fact that the big corporates are earning huge profits, but they are not eager to invest even if the government increased capex for some years to ‘crowd-in’ private investment.

Investment in physical assets in case of Indian corporates shows a declining growth for the past one and half decades. Also, a large share of corporate profits is increasingly being derived from speculative financial assets that do not require any addition to real productive capacity. In this context of slowing down of investment, consumption demand and rising inequality with marked decline in growth in industry and manufacturing, acute crisis of gainful employment, the budget presented in the parliament falls short of ideas to tackle the current challenge.

STATE OF THE ECONOMY

During the last budget the finance minister expected a nominal GDP growth rate of 10.5 per cent but according to the First Advance Estimate (FAE) for the FY 2024-25 nominal GDP is growing at 9.8 per cent. The real GDP growth estimated by the Economic Survey last year was 6.5-7 per cent which turns out to be 6.4 per cent as per the FAE released by the NSO. These figures are any way lower than the preceding FY 2023-24 figures when the economy in real terms grew by 8.2 per cent according to the provisional estimates. The composition of GDP suggests that Private Final Consumption Expenditure(PFCE) constitutes 56.3 per cent of the GDP and Gross Fixed Capital formation (GFCF) accounts for one-third of the GDP sharing 33.5 per cent. According to the CAG report, the capital expenditure of both centre and states show a declining growth in the past 4 years. In the first half of the current fiscal year only 5 out of 17 states show a rise in capital expenditure compared to previous year. The growth in consumption expenditure seems to be an overestimation. Because according to the household consumption expenditure figures recently released by NSO, on an average consumption expenditure for rural and urban households increased in nominal terms by 9.2 per cent and 8.3 per cent respectively. Considering a general price index growing at 5 per cent and food inflation of 8.6 per cent, there had been hardly any growth in consumption expenditure in real terms. The FAE figures suggest that per capita income in constant (2011-12) prices grew by 5.4 per cent which is less than the growth of GDP but more importantly per capita private final consumption expenditure at constant prices grew by 6.3 per cent. If that is the case, then there would be a net draw down of the savings in the FY 2024-25.Actually, this high growth of per capita PFCE is because of the base effect and if we correct that, the real growth of PFCE will be close to 4 per cent, hence the real GVA growth calculated on the basis of high PFCE growth will be lower than the 6.4 per cent growth estimated.

It is difficult to decipher and explain the estimated high growth when growth fell in almost all the sectors. Growth in mining and quarrying declined from previous year’s figure of 7.1 per cent to 2.9 per cent, manufacturing growth fell from 9.9 per cent to 5.3 per cent, utilities from 7.5 to 6.8 per cent, services such as trade, hotels, transport and communication declined from 6.4 per cent to 5.8 per cent and finance and personal services fell from 8.4 per cent to 7.3 per cent. Therefore, despite lot of tall talks on industrial policy particularly of ‘Make in India’ and ‘Digital India’ growth of industry and services suffers a dip. In fact, for manufacturing in the first half of the FY 2024-25 the growth was only 4.5 per cent and to realise the estimated annual growth at the end of the current financial year to be 5.3 per cent, growth in manufacturing in the second half has to be 6.1 per cent. Most importantly sectors such as manufacturing, retail trade, transport and construction are the major employment generating sectors in the non-agricultural sector and a decline in growth rate in these sectors would have negative impact on the already dismal scenario of employment. These trends are validated by the year-on-year decline reported in FAE in the case of cement production that declined from 10.3 per cent growth of FY23-24 to 3.1 per cent in FY 2024-25, consumption of steel declined from 15.2 per cent to 12.3 per cent, sales of commercial vehicles declined in absolute terms and aggregate bank credit and also deposit declined in the current year. Scheduled commercial banks’ incremental credit declines from 21 lakh crore of the previous year to 11.5 lakh crore.

The budget failed to address the prime concerns of the economy, namely severe crisis in gainful employment, rising inequality, slowing down in private investment and low growth in private consumption expenditure. During a slowing down of growth the government spent more than one lakh crore less than the budget estimate last year. In fact,there has been a consistent decline in expenditure as percentage of GDP over the years since 2020-21. It came down from 17.7 per cent in 2020-21 to 14.2 per cent in 2025-26 budget estimate. The government spent 11584 crores less in education, 7830 crores less in food subsidy and 75133 crores less in rural development than what was budgeted last year. In health also the cut was 1255 crores. Having miserably failed in increasing manufacturing growth despite spending huge amounts for ‘Make in India’ campaign, now the finance minister seems to have shifted the engine of growth to agriculture. However, the figures show that last year there was a huge cut in the tune of 75 thousand crores in agriculture and allied sectors. The transfers for  centrally sponsored schemes have been cut down by Rs 90642 crores and the Finance Commission Grants to state have also been reduced. By cutting down expenditures in social sector and allocations of transfer to states, the FM could contain the fiscal deficit to 4.8 per cent of GDP. It is clear enough that drastically cutting down expenditures particularly when the government earned more revenue than what was budgeted, the intention is to appease the finance capital and improve ratings of financial agencies.

REVENUE FOREGONE

FOR WHOM?

The move of increasing upper limit for income tax and rebates extended to 12 lakhs is likely to benefit personal income taxpayers who have annual incomes more than 4 lakhs. The number of taxpayers likely to be availing the rebate is estimated to be 5.6 crore accounting for only 3.8 per cent of the population of India. As the tax experts suggest, the biggest benefit of the tax revision in terms of quantum will be accrued to people who earn annual income more than Rs 20 lakhs. For instance, those who earn Rs 8-12 lakhs per annum would be saving on an average Rs 38.5 thousand while those who earn more than Rs 24 lakhs would be saving Rs 1.1 lakh in a year. Hence the bigger shares of the one lakh crore revenue in income tax foregone will be adding more to real incomes of the already few rich and upper middle class. It is ridiculous to claim that this is going to boost consumption expenditure in the economy when according to PLFS data provided by the government, the average annual income of a regular/salaried worker in 2024 in India was Rs 2.5 lakh, that of a casual worker if employed for at least 20 days in a month throughout the year, the average annual income turns out to be little more than one lakh and the average annual income of a self-employed person in India is only Rs 1.67 lakhs. The government could have reduced excise duties on petrol and diesel benefitting the larger section of the population by containing inflation and increasing disposable incomes of the masses.

This budget has stood for the rich and upper middle class and foregone revenues which could have provided resources for genuinely enhancing real incomes of the 95 per cent of the working population who couldn’t even recover their real incomes since the pandemic.