Nitishastra 2.0 – Envisioning the Budget

Panelist: 

Dr Pankaj Sharma, HOD Finance (SCMHRD) 

Mr Sunit Joshi, Adjunct Faculty (SCMHRD)
Mr Alok Katre, Associate Professor  (SCMHRD)

Moderator: Dr Shagun Thurkal, Adjunct Faculty (SCMHRD) 

Pre-Union Budget Discussion 2025: Insights and Expectations

The pre-Union Budget discussion for 2025 brought together eminent panelists from finance, taxation, and economic policy domains to evaluate India’s economic scenario and deliberate on what the upcoming budget could prioritize. The dialogue revolved around fiscal discipline, demand generation, and the need for actionable implementation of policies, emphasizing their potential to impact India’s growth trajectory.

Current Economic Landscape

India stands at a critical juncture:

• GDP Growth: The second quarter GDP growth rate fell to 5.4%, significantly below expectations, indicating weakening economic momentum.
• Inflation: Though slightly below 6% in recent readings, inflation remains concerning due to persistently high food prices, which averaged over 10% throughout the year.
• Global Context: Geopolitical instability, supply chain disruptions, and trade uncertainty, particularly from evolving US policies, have added pressure to domestic economic conditions.
• Fiscal Challenges: A current account deficit, declining private CapEx, and subdued equity markets highlight the pressing need for targeted interventions in the Union Budget.

Themes Explored in the Discussion

1. Policy vs. Implementation: Addressing Paralysis

Panelists highlighted the government’s strong track record in policymaking but pointed out its persistent struggles with implementation.

• Many initiatives, including credit guarantee schemes for MSMEs, suffer from bureaucratic hurdles, limiting their reach and effectiveness.
• Experts termed this as “implementation paralysis” and stressed the urgency to bridge this gap to maximize the benefits of well-structured policies.

2. Capital Expenditure (CapEx) and Demand Stimulation

A recurring theme was the tension between the government’s focus on CapEx and the need to boost consumption-driven demand:

• Public CapEx: While infrastructure development has received significant allocations in previous budgets, the actual utilization has often fallen short of targets (e.g., an estimated 9.5 lakh crore out of the 11 lakh crore allocated for FY24). Implementation delays in areas like highways and railways were flagged as key concerns.
• Private CapEx: Despite marginal improvements last year, private investment remains sluggish, with capacity utilization hovering at 75%-78%, below the threshold for incentivizing new projects. Participants called for targeted measures to revive private CapEx, such as sector-specific incentives and ease of doing business reforms.
• Demand Generation: The panelists emphasized that demand is the critical missing piece, arguing that fiscal policy should prioritize putting disposable income into the hands of middle- and lower-income groups. Suggestions included rationalizing income tax structures, raising exemption limits, and introducing incentives for consumption.

3. Fiscal Prudence vs. Growth Needs

Maintaining a fiscal deficit of 4.5% for FY26 has been a consistent goal for the government. However, panelists debated the trade-offs:

• Flexibility in Fiscal Deficit: Many argued that slight flexibility, pushing the deficit to 4.6%-4.7%, could be acceptable if it directly stimulates economic activity and creates jobs.
• Revenue Concerns: Tax collections have plateaued, with GST revenues stabilizing around ₹1.7-1.8 lakh crore per month. Panelists pointed out that the government might need to rely on other revenue sources, such as a larger RBI dividend or strategic disinvestment proceeds.
• Taxation Reforms:
  • Concerns were raised over the dual income tax regimes, with experts suggesting that the older regime’s incentives for savings be extended to the new regime.
  • Capital gains taxation also emerged as a contentious topic, with fears of increased rates adding to market volatility.

4. Focus on Social Sectors

Education and healthcare were flagged as critical yet underfunded areas:

• Education: Expenditure on education has fallen from 3.9% of total budget spending in FY20 to just 2.6% in FY24. Panelists called for increased investment in primary education, teacher recruitment, and infrastructure to address glaring gaps in public schooling.
• Healthcare: Despite lessons from the COVID-19 pandemic, healthcare spending remains inadequate. Recommendations included lowering GST on health-related services and increasing allocations to rural and preventive healthcare programs.
• Panelists agreed that addressing these sectors is essential for long-term economic and human capital development.

5. Bond Markets and Fiscal Policy

The bond markets are expected to react primarily to the government’s gross borrowing numbers and its ability to manage the fiscal deficit.

• Yields and Borrowing: The panel noted that bond yields have been softening, reflecting confidence that the government will limit additional borrowing.
• Currency Concerns: A shrinking spread between US and Indian 10-year yields (now around 200 basis points) could increase pressure on the currency, deterring foreign investments in debt.
• Recommendations for RBI: Panelists suggested reducing CRR and SLR requirements to ease liquidity pressures on banks, which remain tight despite OMO interventions.

6. Sector-Specific Recommendations

• MSMEs: With a credit gap of ₹45 lakh crore, MSMEs continue to face challenges accessing affordable financing. While schemes like the National Credit Guarantee Scheme exist, they require simplification and better execution.
• PLI Schemes: Production-Linked Incentive (PLI) schemes have been effective in sectors like electronics but need expansion to labor-intensive areas like textiles and auto components to create employment opportunities.
• Labor Markets: The lack of blue-collar jobs was highlighted, with panelists urging investments in skill development and manufacturing clusters to boost employment.

Conclusion

The pre-budget discussion highlighted that India’s economic challenges cannot be resolved by fiscal prudence alone. The government must strike a balance between maintaining fiscal discipline and addressing immediate growth needs. Key priorities should include:

• Generating demand through tax reforms and targeted social sector spending.
• Expanding labor-intensive manufacturing and incentivizing private CapEx.
• Increasing allocations to healthcare and education to build long-term resilience.

Crucially, the focus must shift from merely formulating policies to ensuring their effective implementation. The 2025 Union Budget presents an opportunity to chart a decisive course for sustainable growth while addressing the pressing concerns of a struggling middle class and underserved social sectors. As India navigates a complex global and domestic economic environment, this budget will set the tone for its economic trajectory in the years to come.