Budget 2025 and the economic slowdown

This year’s Budget may have provided income tax relief for taxpayers, but has it done enough to tackle the slowdown? GDP growth is slipping from 8.2% in FY24 (P) to 6.4% in FY25 (AE1). Budget 2025 estimates ‘nominal’ growth in FY26 at 10.1% and the Reserve Bank of India estimates inflation for FY26 to be 4.2% (MPC, February 2025)—taking ‘real’ growth to 5.9%. And if the Economic Survey 2024-25 is considered, FY26 growth is expected at 6.3-6.8%, which points towards stagnation.

Plus, there are potent external risks from US tariff threats, rising crude prices and a falling rupee—all of which weaken the exports (growth) engine. It wouldn’t be unreasonable to assume that the pent-up demand driven post-pandemic recovery is slipping.

Focus on fiscal austerity

Given that the growth estimates are not showing an upward spike, Budget 2025 could have gone for fiscal expansion, but the emphasis this year is on tightening the fiscal space. Total expenditure does go up by 5% in ‘nominal’ terms (from the budgeted ₹48.2 lakh crore in FY25 to ₹50.6 lakh crore in FY26)—but that may not materialise for two reasons. One, the fiscal deficit is pegged to go down from 4.9% in FY25 (BE) and 4.8% in FY25 (RE) to 4.4% in FY26 (BE). The primary deficit (fiscal deficit minus interest payment) is also going down from 1.4% in FY25 (BE) to 1.3% in FY25 (RE) and further to 0.8% in FY26 (BE). The other reason is a first-of-its-kind emphasis on debt-to-GDP as “the fiscal anchor” in the FRBM compliance statement, which pegs down debt-to-GDP from 57.1% in FY25 (RE) to 56.1% in FY26 (BE).

It may also be pointed out that the budgeted expenditure for FY25 has not been met, with the revised expenditure falling by 2.2% (from ₹48.2 lakh crore to ₹47.2 lakh crore). Going by the emphasis on tightening the fiscal space, there may be little ‘real’ growth in expenditure in FY26.

The only growth engine the Centre seems to be relying on (since 2019 and more so after the pandemic hit) is government capex. It goes up by 0.9% in ‘nominal’ terms over FY25 (BE). But the Revised Estimates for FY25 show a fall of 8.3% in the Centre’s capex (the Centre’s) from ₹11.1 lakh crore to ₹10.2 lakh crore.

The Controller General of Accounts (CGA) shows the Centre’s capex stalling with actual spending of 61.7% of the budgeted money until December 2024. Though the Centre explained this slowdown to the general election of 2024, former finance secretary Subhash Garg is of the view that government capex has run out of steam.

Agriculture and rural development

Agriculture sustains a chunk of the population (54.6%) and provides maximum jobs (46.1%) but its share in the GVA share is only 14-15%. Plus, agriculture also faces massive reverse migration, reflected in the rise in both the number of farm households (up from 48% in 2015-16 to 57% in 2021-22, as per NABARD’s October 2024 report) and workers (from 44.1% in 2017-18 to 46.1% in 2023-24, as per PLFS 2023-24). Besides, MSMEs also employ a lot of people, 51% of whom are in rural areas.

The Budget allocation for agriculture and rural development, however, is up by 4.9% in ‘nominal’ terms. MSMEs get more credits, while the allocation for rural job scheme MGNREGS remains flat at ₹86,000 crore. The only new initiative is a Makhana Board in Bihar.

Two other areas that should have received more spending should have been education and health, to raise income and productivity. Allocation for education is up by 2.4% in ‘nominal’ terms. And the health budget is up by 10% in ‘nominal’ terms but remains less than 2% of the total Budget expenditure for the third consecutive year. Also, allocation for primary healthcare is 40%, against the 2017 National Health Policy’s prescription of “up to two-thirds or more”.

The unorganised sector

The income tax relief is an acknowledgement that consumption demand—the main growth engine—is the big issue. But this relief may benefit only a small part of the population. By removing tax liability for income up to ₹12 lakh, up from ₹7.5 lakh, it would benefit 10 million taxpayers. Expansion in tax slabs for higher incomes would benefit another 7.5 million. This takes the total beneficiaries to 17.5 million at a revenue loss of ₹1 lakh crore.

But these 17.5 million beneficiaries are just 6% of the population—taking average family size of 4.8 as per the Census 2011 and total population of 1,408 million as per MoSPI. These measures are aimed at workers in the organised sector workers, while, according to the Ministry of Labour and Employment, 94% of workers (437 million of 465 million) are in the unorganised sector who don’t benefit from tax reliefs.

The beneficiaries are part of “regular wage/salaried” workers, (best quality jobs) which constitute 21.7% of workforce (PLFS 023-24). The Economic Survey of 2024-25 shows, even ‘real’ earnings of these jobs have gone down for the past seven years between 2017-18 and 2023-24 – declining by 6.4% for males and 12.5% for females.

CEA Anantha V. Nageswaran has, on multiple occasions in the recent past, warned against “creeping informalisation” of the workforce and corporate world’s “self-destructive” low wage and contractualisation amidst soaring profits.

Another factor that should have been addressed is tax regressivity—income tax collections being higher than that of corporate tax and indirect tax collection being higher than that of direct tax. Now, corporates are big financial entities who pay tax on profits after deduction of their expenses, unlike individual income taxpayers; they also get subsidies. On the other hand, GST puts a higher burden on ordinary citizens.

Jobs and income

The best way to raise consumption is to create more quality jobs to generate more income. For the second consecutive year, the Economic Survey (of 2023-24 and 2024-25), emphasises on the need for it, stating that “India will also need to create 78.5 lakh new non-farm jobs annually till 2030”. An analysis of announcements in this year’s Budget shows 21 lakh direct and indirect jobs in FY26 may be generated, which falls short of the need.

The prolonged job crisis is due to the failure of manufacturing to deliver. Its share of manufacturing has gone down from 12.1% in 2017-18 to 11.4% in 2023-24 (PLFS). The PLFS also shows, the biggest chunk of workers, “self-employed” (which includes agricultural workers) are also the most vulnerable, their number swelled from 52.2% in 2017-18 to 58.4% in 2023-24 but their average monthly “earnings” went down from ₹14,792 in 2017-18 to ₹13,279 in 2023-24, down 10.2% without even accounting for inflation.

Tackling this crisis is still some distance away.

The author writes on economics, governance and politics. His books include 'What Derailed the Indian Economy' and 'Attack on the Idea of India'. Views are personal.