Budget 2025: Focused on fiscal discipline, growth, and tax relief

As is always the case, the Budget brings in a lot of expectations from different sections of society. Some want a consumption boost, some want big spending on infrastructure, some want tax relief, some want a tight fiscal policy, some want welfare spending, and some want transformative reforms, and so on. Many of these demands contradict each other, and it is not possible to please everyone. However, within these constraints, the finance minister (FM) has delivered yet another brilliant Budget, although some sections of society may feel unhappy.

 

First and foremost, the government has shown a strong resolve to stay disciplined on the fiscal front, which is crucial for long-term macro stability. A loose fiscal policy—simply put—means spending more than what you earn. And if governments do this year after year, who pays this debt? The next government. And the next government does the same, and ultimately, the burden falls on the next generation. We owe fiscal discipline to our future generations.

 

The FM delivered a Budget that was fiscally tighter than market expectations. The fiscal deficit of 4.8 per cent of GDP for FY25 was 10 basis points lower than budgeted, and the FY26 target of 4.4 per cent is in line with our expectations. The government aims to lower its debt-to-GDP ratio from 57 per cent now to 51 per cent by FY31, which implies a further decline in the fiscal deficit to approximately 3.5-3.6 per cent by FY31—where it was before Covid.

 

A lower fiscal deficit also has the added benefit of reducing government bond issuances, thereby eventually lowering the cost of borrowing in the country. This should provide headroom for the Reserve Bank of India (RBI) to improve liquidity and, eventually, cut interest rates. We expect a dovish policy stance in its upcoming Monetary Policy Committee meeting on February 7. This should be seen as a positive for rate-sensitive sectors such as property, non-banking financial companies (NBFCs), and banks.

 

Strong fiscal discipline requires spending discipline, which means that while the government’s total expenditure for FY26 is a substantial Rs 50 trillion, it implies a growth of only 7.4 per cent. Given this constraint, the government has done a commendable job in proposing a 10 per cent capital expenditure (capex) growth aimed at building long-term assets. While this is a relatively low number, it follows a strong period of capex growth between FY20 and FY25. During these five years, capex spending rose a whopping threefold, often at the cost of welfare spending. It is only appropriate that expenditure now needs to be rebalanced, given that household investments (in housing) and private corporate spending (in power, airports, ports, and manufacturing capacities) have started growing. This sends a strong message that expenditure rebalancing is underway, and equity markets should prepare for lower capex going forward. This is a fair approach, as the government undertook significant spending when it was most needed during the post-Covid recovery period.

 

The biggest positive is the proposed income tax cut. This is again a bold move by the government that rewards honest taxpayers. While there are 90 million individual tax filers in India, only 35 million actually pay taxes. Hence, the total tax relief of about Rs 1 trillion accrues to these 35 million taxpayers, averaging Rs 30,000 per taxpayer. It is perhaps the first time such a large pool of taxpayers is seeing meaningful savings. This should positively impact consumer durable demand in India.

 

Overall, the government has taken a disciplined approach in this Budget, keeping long-term benefits in mind. This will go a long way in boosting investor confidence.

 

The writer is MD and head of research, Jefferies India

 

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper