Shoubik Sejwal and Alakh Mehta
The Prime Minister’s clarion call for a “Viksit Bharat” or a developed India by 2047, requires the world’s fastest major growing economy to register GDP growth between 9% to 10%. After months of sell-off in the Indian markets and a subdued consumer sentiment, the world’s most populous nation is growing at 6.4%, indicating a modest slowdown in economic momentum. Can the Budget 2025 turn the corner on investors confidence and propel India towards its ambitious targets for 2047?
India’s Union Budget 2025-26, presented by Finance Minister Nirmala Sitharaman, hopes to address the current economic challenges while laying a foundation for long-term growth. The budget introduces significant reforms across taxation, infrastructure, manufacturing, and social sectors, aiming to stimulate demand, attract investment, and enhance productivity.
Tax Relief for the Middle Class, A First:
A notable highlight of the budget is the substantial relief provided to the middle class through personal income tax cuts. The tax exemption threshold has been increased, and tax rates for higher incomes have been reduced. This move is expected to boost household consumption, savings, and investment, thereby stimulating domestic demand. The government said people earning up to 1.28 million Indian rupees ($14,800) per year will not have to pay any taxes, raising its threshold from 700,000 rupees. It also lowered tax rates for people earning above the new threshold. “The new structure will reduce taxes on middle class and leave more money in their hands, boosting household consumption, savings and investment,” Finance Minister Nirmala Sitharaman said in parliament. The move will result in an annual 1 trillion Indian rupee ($11.6 billion) hit to Treasury revenues. Per capital income is around $2,700 for India’s population of 1.4 billion, with about one third considered middle class. The tax cut is “likely to spur consumer demand and savings by the middle class that has faced challenges from elevated inflation and lower income growth,” Sakshi Gupta, economist at HDFC Bank.
Marginal Increment in Capex Expenditure:
The government has announced a modest increase in capital spending to offset revenue losses from tax cuts. This includes investments in infrastructure projects aimed at improving connectivity and supporting economic activities. Capex expenditures will rise to 11.21 trillion rupees in 2025-26 compared to a lowered 10.18 trillion in the current year. The market’s response has been mixed, with concerns about the adequacy of these measures in driving substantial growth.
The budget also places emphasis on promoting high-yield crops in agriculture and boosting manufacturing and exports. Recognising agriculture as a key driver of development, the budget introduces the ‘Prime Minister Dhan-Dhaanya Krishi Yojana,’ targeting 100 low agricultural productivity districts. This initiative aims to boost farm output and income, contributing to rural prosperity and overall economic growth. Additionally, efforts to increase foreign direct investment in sectors like insurance are highlighted. These initiatives aim to enhance productivity and competitiveness in key sectors of the economy.
For micro, small and medium enterprises, the budget proposes measures to enhance credit access, technological adoption, and market linkages for MSMEs, aiming to boost their competitiveness and contribution to the economy. This includes credit through KCC to facilitate short term loans for 7.7 crore farmers, 02 fishermen, and dairy farmers with enhanced loan of ₹5 lakh.
Global Headwinds:
Meanwhile, global economic conditions are also becoming less supportive. US President Donald Trump has ignited trade tensions and supply chain uncertainty. The budget did, however, slash duties on products including electronics and textiles, which will support manufacturers, and on motorcycles, which may ward off US tariff threats. The announcement of a committee to review the plethora of paperwork that impedes business is also promising. And a commitment to fiscal discipline means that India’s debt path is on a more stable footing just as market volatility is set to pick up.
Proposed Amendments in Nuclear Laws:
Moreover, in an imperative policy shift, the government proposes to amend the Civil Liability for Nuclear Damage Act of 2010 and the Atomic Energy Act of 1962 to attract foreign and private investments in the nuclear sector. This move aims to facilitate international collaborations and expand nuclear power infrastructure, contributing to India’s energy security and climate change goals.
Fiscal Deficit:
The total expenditure for 2025-26 is estimated at ₹50.65 lakh crore, with net tax receipts projected at ₹28.37 lakh crore. The government has set the fiscal deficit target at 4.4% of GDP for FY2025-26, aligning with its commitment to fiscal consolidation. To finance this deficit, gross market borrowings are projected at ₹14.8 lakh crore, a 5.7% increase from the previous year. While this move aims to fund developmental projects, it has raised concerns about potential crowding out of private investment and upward pressure on interest rates.
The budget outlines an ambitious asset monetisation plan targeting ₹10 lakh crore, aiming to unlock value from underutilised public assets. This initiative is expected to generate additional revenue and improve infrastructure efficiency. However, the success of this plan hinges on effective implementation and market conditions.
FDIs and FIIs:
Outflows of foreign direct investments (FDIs) and foreign institutional investors (FIIs) have been a central concern surrounding the soundness of the investment atmosphere in India. In a significant policy shift, the government proposes to increase the FDI limit in the insurance sector from 74% to 100%. This move is anticipated to attract substantial foreign capital, enhance competition, and improve insurance penetration in the country. Additionally, the government plans to review and simplify conditions for foreign investment across various sectors to foster a more investor-friendly environment.
Analysts expect these measures to stimulate consumption and drive economic growth. However, concerns remain regarding the ambitious fiscal deficit target and the reliance on substantial market borrowings.
The Union Budget 2025-26 presents a balanced approach, aiming to stimulate economic growth through tax reforms, gradual increase in capital expenditure, and structural reforms in key sectors. While the initiatives are promising, their success will depend on effective implementation, global economic conditions, and supportive monetary policies.