Budget: Sitharaman juggles I-T relief, economic growth with fiscal prudence

The Union Budget for 2025-26 presents a strategic fiscal framework to ensure economic stability, reduce the fiscal deficit, and enhance revenue and expenditure management.

A significant highlight of this year’s budget is the focus on income tax exemptions, which provide relief to taxpayers while reinforcing fiscal discipline. The government seeks to drive sustainable growth and long-term economic resilience by prioritising infrastructure development alongside prudent financial management.

A key highlight is the targeted fiscal deficit reduction. For FY26, the government has set a fiscal deficit target of 4.4 per cent of GDP, a notable improvement from the revised estimate of 4.8 per cent for FY25. This aligns with the broader strategy of achieving long-term macroeconomic stability.

Historically, India's fiscal deficit peaked at 9.2 per cent in FY21 due to pandemic-induced expenditures. Since then, the government has consistently brought it down, reaching 5.8 per cent in FY24 and now aiming for further consolidation.

Measured approach

This measured approach signals the government’s commitment to responsible fiscal management while sustaining economic growth. The budget also reflects the government's borrowing strategy, with gross borrowing projected at ₹14.82 lakh crore, aligning with fiscal discipline while supporting economic expansion.

On the revenue side, the government projects total receipts (excluding borrowings) at ₹34.96 lakh crore. This includes net tax receipts of ₹28.37 lakh crore, reflecting an increase from previous estimates.

The budget challenges the notion of a greater reliance on indirect taxes, as direct tax collections are growing faster than indirect tax collections. Gross tax revenue is projected at ₹42.70 lakh crore, an 11 per cent growth over FY25. Non-tax revenue is estimated at ₹5.83 lakh crore, including dividends from public sector enterprises and the Reserve Bank of India (RBI).

Direct taxes are projected to grow to ₹25.20 lakh crore.

Indirect taxes are projected to grow to ₹17.50 lakh crore.

Source of revenue

This shift underscores a broader trend where direct taxes are becoming a more dominant source of revenue, reflecting improved tax compliance and a growing formal economy.

To bridge the fiscal deficit, the government plans to adopt a multi-pronged approach:

Market Borrowing: Gross market borrowing is pegged at ₹14.82 lakh crore, with net market borrowing at ₹11.54 lakh crore. This indicates a reliance on debt markets while ensuring borrowing remains within sustainable limits.

Enhanced Revenue Collections: The government is focused on improving tax compliance and broadening the tax base to generate additional revenue without significantly increasing tax rates.

Disciplined Expenditure Management: While increasing capital expenditure, the government maintains strict control over current spending to ensure fiscal sustainability.

One of the notable announcements pertains to regional development initiatives, particularly in Bihar. These include setting up a Makhana Board, four greenfield airports, a national institute of food technology, and the expansion of IIT Patna. These sops indicate that they have been announced with an eye on forthcoming elections in Bihar.

Targeted investments

Despite its conservative spending approach, the budget includes targeted investments in technology, energy, and regional infrastructure. The ₹20,000 crore Nuclear Energy Mission aims to drive India’s push toward 100 GW nuclear power capacity by 2047, fostering private sector involvement.

Additionally, exemptions on Basic Customs Duty (BCD) for critical minerals like cobalt and lithium-ion battery waste will support domestic electronics and EV manufacturing. The disinvestment target for the Union Budget 2025 is set at ₹51,000 crore.

This represents a decrease compared to the previous year's target of ₹65,000 crore for the fiscal year 2024-25. The reduced target may indicate a more cautious approach to disinvestment, possibly reflecting challenges in selling stakes in certain public sector enterprises. The FDI limit for insurance companies has also been raised from 74 per cent to 100 per cent. This is based on the condition that foreign companies must invest all premiums collected in India, which ensures that capital remains within the domestic economy.

Gig economy

Recognising the growing gig economy, the budget introduces a dedicated social security scheme covering one crore gig workers under the Pradhan Mantri Jan Arogya Yojana, ensuring healthcare access. Formal identity cards and integration into the e-Shram portal aim to bring gig workers into the formal financial system. At the same time, an expansion of PM SVANidhi will provide ₹30,000 UPI-linked credit cards for street vendors, supporting financial inclusion.

The Union Budget 2025-26 presents a structured and strategic fiscal framework that balances the need for economic growth with financial prudence. By prioritising capital expenditure, enhancing revenue generation, and ensuring a disciplined budgetary approach, the government is laying a strong foundation for long-term economic resilience. While challenges such as high-interest payments and the need for increased revenue mobilization persist, this budget reflects a clear commitment to fostering stability and sustainable development.