Budget 2025: Will India’s growth gamble pay off, or is fiscal discipline at risk?

Union Budget 2025-26 is expected to prioritise capital expenditure, reinforce the focus on employment generation and skilling, and boost manufacturing capacity while adhering to fiscal consolidation, according to rating agency ICRA. The fiscal deficit target for FY26 is likely to be set at 4.5% of GDP, lower than the budgeted target of 4.9% for the current fiscal year (FY25), ICRA stated. The agency anticipates that the Union Budget will set a capital expenditure target of approximately ₹11 lakh crore for FY26.

According to ICRA, Budget 2025-26 should include adequate allocations for infrastructure sectors such as roads, railways, and highways, as well as for defence, with a focus on increasing exports and promoting self-reliance.

In a detailed pre-Budget note, ICRA highlighted that the government is expected to reinforce its focus on employment and skilling to address labour market challenges. “Consequently, there may be a fresh allocation of ₹30,000-35,000 crore towards employment-linked incentive and internship schemes launched in the July 2024 Budget. Additionally, the allocation for the PLI scheme may be increased in FY26, with a likely extension to other labour-intensive sectors to boost domestic manufacturing. Furthermore, the government is expected to focus on implementing measures to enhance credit flow to the MSME sector, as announced in the FY25 Union Budget,” the agency noted.

On the revenue front, ICRA estimates gross tax revenue to grow by 10.5% to ₹42.5 lakh crore in FY26 over the projected level for FY25. It expects direct tax collections to rise by 11.8% year-on-year to ₹24.4 lakh crore in FY26. GST collections, including compensation cess, are estimated to show moderate growth of 10.5% in FY26. The agency anticipates that the RBI’s dividend surplus will decline in FY25 from the record ₹2.1 lakh crore in FY24 and, consequently, expects overall dividends and profits from public sector enterprises to grow by 12-13%. The disinvestment target is projected to remain at ₹50,000 crore for FY26.

ICRA also estimates the total outlay for major subsidies—including food, fertiliser, and fuel—at ₹4.2 lakh crore in FY26, reflecting a modest 3% increase over the expected ₹4 lakh crore allocation for the current fiscal year.