Noble intentions, but questions remain: Budget's allocations fall short

This was an opportune moment to get rid of the old tax system entirely and move fully to the new one. A broad-based, low-rated, and less differentiated tax structure is the need of the hour

The Budget speeches often underline many honourable intentions, but closer examination raises many questions. In this Budget too, Finance Minister Nirmala Sitharaman has put forward many noble intentions, such as accelerating growth, securing inclusivity, galvanising private investment, and increasing the spending power of the middle class. The question is to what extent these intentions are translated into  policy actions in the Budget.

 

This is the eighth successive Budget presented by Ms Sitharaman, and admittedly, over the years, her Budgets have acquired some important desirable features.  The first is the realism of the Budget, particularly in revenue estimates.  In this Budget, the nominal growth of the economy is projected at 10.1 per cent over the revised estimate of the current year, and the gross tax revenue is estimated to grow at 10.8 per cent. This works out to a buoyancy of 1.06, which is eminently achievable. 

 

With the increase in revenue expenditure contained at 6.7 per cent, it should be possible to achieve the budgeted revenue, fiscal, and primary deficit targets. Realistic tax revenue projections do not place unrealistic targets on tax administrators and spare the taxpayers from possible pressures.

 

The second important feature of the recent Budgets has been ensuring greater transparency by making them comprehensive by including off-Budget transactions. Greater transparency enables a more realistic analysis of macroeconomic implications.  Third, in keeping with past practice, the budgeted allocation to capital expenditure shows an increase of 10.1 per cent over the revised estimate of the current year. However, the revised estimate of the current year is lower than the budgeted amount by Rs 92,800 crore due to the restrictions placed by the elections. In fact, the budgeted capital expenditure for 2025-26 is only about Rs 10,000 crore  more than the Budget estimate of 2024-25.  In some ways, this is a bit disappointing, but the choice is between having larger public investments and reducing the fiscal deficit.

 

The fourth important feature is the continued effort at fiscal consolidation.  The fiscal deficit next year is estimated at 4.4 per cent of gross domestic product (GDP), which is marginally better than the target promised a couple of years ago. This is partly due to lower capital expenditures in the current year, as alluded to above.  Notably, the Budget seeks to bring down the revenue deficit by Rs 86,200 crore or 0.4 per cent of GDP, which, if achieved, is impressive.  

 

The most important macroeconomic issue in the Budget speech, which was merely mentioned in passing, is the fiscal consolidation path laid out in the Fiscal Policy Statement presented under the  Fiscal Responsibility and Budget Management (FRBM)Act, 2003.Taking debt as the anchor for fiscal consolidation, the glide path for debt-to-GDP ratio is projected to come down from 57.1 per cent of GDP in the current year to 50 per cent (plus or minus one per cent) of GDP by 2030-31.  This shows that the government intends to continue with fiscal consolidation by bringing down the debt-to-GDP ratio to more sustainable levels, thereby providing greater borrowing space and reducing the cost of borrowing for the private sector. 

 

To what extent can the Viksit Bharat objectives set out in the Budget speech be achieved? The Budget speech sets out the objects as ensuing zero poverty, providing good quality education, affordable comprehensive healthcare, imparting skills to enhance productivity, increasing women’s participation in economic activities, and empowering the farmers to make the country the “food basket of the world”.  These are well-intended, but the allocations in the Budget do not match the intentions. The allocation to education (including higher education) in the Budget is only 12 per cent higher than the current year, while health spending is up by 10.8 per cent.  It is not different in other areas of skilling, and women’s and farmers’ empowerment. It is true that states will have to play a predominant role in achieving these goals, and that allocation alone does not guarantee outcomes.  Even so, the stated objectives in the Union Budget remain as mere rhetoric.

 

On the tax policy front, the statement in the Budget speech that the government will soon come out with a new income tax Bill is welcome. Hopefully, it will reduce ambiguities, litigation, and both administrative and compliance costs.  However, the finance minister has missed yet another opportunity to simplify the income tax structure in the Budget.  This was an opportune moment to get rid of the old tax system entirely and move fully to the new system.  A broad-based, low-rated, and less differentiated tax structure is the need of the hour. Moving to the new system without having several tax concessions and preferences should have been done.  

 

Even in the new system, it is not clear what is sought to be achieved by having seven rate categories.  With hardly about 2.5 per cent of the population actually paying income tax, how is such a finely differentiated tax structure supposed to bring about vertical equity?  Before 1991, there were 12 rate categories.  This was brought down to four based on the recommendations of the Chelliah committee and the 1996 Budget brought it down to three, excluding exemptions.  

 

The current seven-rate structure needs to be urgently simplified to reduce administrative and compliance cost.

 

  The author was a member of the Fourteenth Finance Commission and former director, National Institute of Public Finance and Policy. The views are personal