As India navigates an increasingly complicated global economic landscape, Budget 2025 emerges as a critical policy statement to balance growth imperatives and budgetary discipline. In this study, we look at the revolutionary potential and inherent obstacles to the budget's main provisions.
The Financial Framework: Beyond the Numbers
The planned budget deficit of 4.4% for FY26 is more than simply a statistic; it symbolizes a careful balance of growth and stability. While the drop from 4.8% is minor, it must be considered in light of increased global uncertainty and internal development imperatives. What's most noteworthy is the government's approach to income generation. The expected 11.1% rise in collections looks ambitious but not implausible, particularly given the increased tax base and enhanced compliance methods.
One cannot ignore the systemic shift in tax policy. Raising the basic exemption level to ₹12 lakhs is more than just a popular move; it signals a fundamental shift in India's tax structure. By possibly removing almost one crore individuals from the tax net, the government is ultimately counting on consumption-driven growth. However, this brings up a crucial question: Will the predicted increase in consumption compensates for the ₹1 trillion income loss?
Key Changes in Deductions and Compliance
A standard deduction for salaried individuals has increased from ₹50,000 to ₹75,000.
Family pension deduction increased from ₹15,000 to ₹25,000.
TDS and TCS provisions are rationalized to simplify compliance and the administrative burden.
Economic Rationale Behind the Tax Reforms
An impetus toward consumption-led growth
Encouraging private consumption is a core objective of this tax reform as it contributes nearly 60% to India's GDP. By increasing disposable income, the government expects an increase in spending on both essential goods and discretionary goods—this will pump up aggregate demand.
The Keynesian multiplier effect states that an increase in disposable income increases consumption, which leads to increased demand for goods and services, which in turn leads to an increase in production and finally economic growth.
Expected Impact: Demand increase for retail, FMCG, housing, and automobile sectors.
Risks: Possible demand-led inflation calls for countermeasures by the central bank in monetary policy.
Enhancing Tax Compliance and Reducing Evasion
Less complicated tax structures usually encourage better compliance. For a country like India, with only 80 million taxpayers in a total population of 1.4 billion history, these sane measures work towards that goal.
From a Behavioral Economics Perspective: The lower perceived burdens imposed by the tax will lower the incentive to engage in tax evasion or conceal income.
Potential Impact: Formalization of the economy, improved revenue collection, and reduced tax litigation.
Risk: In the short term, it will cause unrest for the government if voluntary compliance does not improve per government expectations, as it will see a slight dip in revenue.
Aligning with Global Tax Trends and Investment Growth
India has historically charged higher personal income tax rates than other world economies, rendering it unattractive to retain talent and invest.
Comparative Analysis: Countries like Singapore (22%) and UAE (0%) offer lower tax rates, and these lead to capital flight from India along with brain drain.
Potential Impact: Seen as a reduced outflow of high-net-worth individuals (HINIs) and professionals in the United States, thus making India more competitive globally vis-a-vis taxes.
Risk: The government may have to depend on an increase in corporate tax or GST collection to make up for the revenue loss on personal tax.
Macroeconomic Influence & GDP growth estimates
Baseline GDP growth for FY2026: 6.8% (pre-budget estimate).
Revised GDP growth forecast: 7.0% – 7.3%, assuming that consumption-driven growth is forthcoming.
Risks to GDP Growth:
Supply Chain Risks: When supply cannot deliver to the expectations of demand, the risk of bottlenecks arises.
Revenue Shortfall: If compliance is not stepped up as we expect, we will get another wave of fiscal stress.
Fiscal Considerations: Revenue vs. Deficits Management
Cutting tax rates leads to a rise in consumption and compliance, but they create challenges for fiscal managers.
By raising the zero-tax threshold to Rs 12 lakh, about one crore taxpayers who paid between Rs 20,000 and Rs 80,000 in taxes will now pay nothing. This change should boost household consumption and savings. It's been estimated that revenue loss will be ₹1 trillion.
Fiscal deficit is targeted for 4.4% of GDP, against 5.8% in FY24. Borrowing Target from the Govt: Rupees 14.82 trillion.
The expectation is that revenue losses will now be compensated for by GDP growth rates, increased collection under GST, and enhanced tax compliance. However, too much reliance on borrowings may create problems for fiscal support in future debts.
Rationalisation Of Custom Tariff Structure for Industrial Goods
Removal of seven tariff rates, in addition to the seven removed in the previous budget. Proposal to exempt social welfare surcharge on 82 tariff lines that are subject to a cess.
Implications
The government forgoes around ₹2,600 crore in indirect tax revenue from these changes.
Increased competition in the domestic market, leads to efficiency in domestic production.
Increased imports from foreign producers affect the market share of domestic producers.
Relief On Import Drugs/Medicines
Lifesaving drugs and medicines to be fully exempted from Basic Customs Duty (BCD).
Proposal to add six lifesaving medicines to the list attracting a concessional customs duty of 5%.
Patient Assistance Programmes run by pharmaceutical companies are fully exempt from BCD, provided the medicines are supplied free of cost to patients. Proposal to add 37 more medicines along with 13 new patient assistance programs.
Implications
Relief for patients suffering from cancer, rare diseases, or severe chronic illnesses.
Increased accessibility for those in need.
Benefitting lower-income groups with comparatively affordable prices.
Critical Minerals
Proposal to fully exempt cobalt powder, waste, and scrap of lithium-ion batteries, lead, zinc, and 12 more critical minerals.
Implications
Ensures availability of critical minerals for manufacturing in India.
Promotes job creation in the mineral and manufacturing sectors.
Textile
Proposal to add two more types of shuttle-less looms to the list of fully exempted textile machinery.
Proposal to revise the BCD rate on knitted fabrics from “10% or 20%” to “20% or ₹115 per kg, whichever is higher.”
Implications
Promotion of domestic production of technical textile products such as agro-textiles, medical textiles, and geo-textiles at competitive prices.
The government may experience a short-term dip in import duty collection due to the expanded exemption.
Electronic Goods
Proposal to increase the BCD on Interactive Flat Panel Displays (IFPD) from 10% to 20%.
Reduction of BCD to 5% on Open Cell and other components.
Implications
Encourages domestic manufacturing by making imported finished IFPDs more expensive.
Likely increase in the price of certain televisions and monitors for consumers.
Reduction of BCD on Open Cell aims to lower production costs for domestic manufacturers.
Lithium-ion batteries
Proposal to add 35 additional capital goods for EV battery manufacturing and 28 additional capital goods for mobile phone battery manufacturing under the list of exempted capital goods.
Implications
Boosts domestic lithium-ion battery manufacturing for both mobile phones and electric vehicles.
Shipping sector
Proposal to continue the exemption of BCD on raw materials, components, consumables, and parts for ship manufacturing for another ten years.
Implications
Reduces costs for telecom infrastructure development at the enterprise scale.
Lowers deployment costs for rural and home broadband expansion.
Prevents classification disputes.
Handicrafts and leather
Full exemption of customs duty on Wet Blue Leather, facilitating easier imports for domestic processing.
Crust Leather, previously subject to 20% export duty, is now duty-free, benefiting small tanners engaged in exports.
Extension of the export period for handicrafts manufactured from duty-free inputs from six months to one year, further extendable by three months.
Key amendments in the customs act
Introduction of section 18a
Businesses can voluntarily revise customs declarations after goods have been cleared.
Importers can self-correct errors, pay the required duty with interest, and avoid penalties.
Reduces compliance risks and enables businesses to rectify errors without audits or investigations.
Avoids litigation and penalties due to unintentional misstatements.
Ensures smoother operations for businesses engaged in frequent imports and exports.
New time limit for refund claims
Refund claims under Section 27 must now be filed within one year from the date of duty payment or interest.
Businesses amending customs entries under Section 18A will have a clear timeframe for reclaiming overpaid duties.
Enhances working capital management, particularly for capital-intensive industries like manufacturing and pharmaceuticals.
Key amendments under GST
Introduction of a Track and Trace Mechanism
Mandates the use of Unique Identification Marking (UIM) for specified commodities under GST.
Ensures better tracking of goods through the supply chain, preventing fraudulent claims.
Prevents counterfeit goods from entering the supply chain, benefiting legitimate manufacturers.
Enhances transparency in GST credits, reducing the scope for tax fraud.
Improved Clarity on Input Tax Credit (ITC) Distribution
Revised rules allow businesses to seamlessly distribute ITC across branches and locations based on actual consumption.
Reduces unnecessary working capital blockages, facilitating smoother operations for large enterprises.
Agricultural Transformation: Beyond Traditional Support.
The 4% rise in the agriculture budget to ₹1.37 lakh crore requires serious analysis. The Dhan-Dhaanya Krishi Yojana focuses on 100 districts with poor productivity, which is particularly significant. Having studied agricultural economics for more than a decade, I view this as a shift from the typical one-size-fits-all model. The scheme's emphasis on district-specific interventions recognizes the variability of Indian agriculture, which policymakers have sometimes disregarded.
In Pulses, the Mission for Aatmanirbharta is particularly noteworthy. Despite being the largest producer of pulses in the world, India has significant production and delivery inefficiencies. Addressing structural issues that output objectives sometimes ignore, such as soil health and water stress, will be crucial to the mission's success.
MSME Sector: A Nuanced Approach to Growth.
The increase in credit guarantee coverage for MSMEs to ₹10 crore signals a substantial shift in risk appetite. However, my study in small company economics indicates that loan availability is simply one piece of the equation. The key innovation is the integration of India Post's huge network (1.5 lakh rural post offices) with the MSME ecosystem. This might potentially alleviate the last-mile connection issue that has plagued us.
The initiative to start a toy company is fascinating. India's current 0.3% share of global exports undervalues the potential of the industry. Although a unique value offer could arise from the focus on local design and manufacturing, competition from well-established rivals will still be fierce.
Infrastructure and Investment: Multiplier Effect
The Urban Challenge Fund's ₹1 lakh crore structure exemplifies skilled policy planning. The requirement for 50% finance from bonds, bank loans, and PPPs generates a multiplier effect while assuring project viability. My study indicates that this might result in considerable positive externalities in urban growth.
The Nuclear Energy Mission (worth ₹20,000 crore) requires particular investigation. While the 100 GW target for 2047 is ambitious, the emphasis on Small Modular Reactors is a practical strategy for nuclear growth. Having studied energy economics, I view this as a critical step toward energy security, albeit public acceptance is still an issue.
Healthcare and Education: Developing Human Capital
The increase of 10,000 medical seats looks insignificant until you consider the cumulative effect over five years. The initiative to establish Day Care Cancer Centers in district hospitals fills a key void in India's healthcare system. However, the success of these measures will be strongly dependent on addressing the persistent lack of healthcare personnel, which requires further attention.
Fiscal implications and growth trajectory
The estimated GDP growth rate of 7.0-7.3% for FY2026 requires serious study. Our econometric study reveals that this is possible, mostly due to:
Tax changes enhance discretionary income.
Effects of infrastructure expenditure multipliers.
Agricultural changes lead to increased production.
Growth in the MSME sector.
However, there are certain risks to consider.
If supply-side restrictions continue, demand-pull inflation may occur. Input costs may also rise due to volatility in global commodity prices.
Problems in the execution of important infrastructure projects.
Trade flows are affected by geopolitical uncertainty.
Innovation in Policy and Structural Changes
Decriminalizing more than 100 provisions of the Jan Vishwas Bill 2.0 is a significant step in reducing the regulatory burden. Although the Investment Friendliness Index for States may encourage healthy competition, care should be taken to prevent a race to the bottom in labor and environmental standards.
Looking Forward: Critical Challenges and Opportunities
While the budget's overall architecture is strong, many major difficulties need to be addressed:
The sustainability of consumption-led growth in an uncertain global context.
As the economy develops, there is a greater demand for stronger social security measures.
Balancing environmental sustainability with rapid industrialization.
The importance of skilling and reskilling in an AI-powered economy.
Conclusion
Budget 2025 reflects a smart attempt at economic development while remaining fiscally responsible. Its success will be defined not just by execution, but also by its ability to adapt to changing global and domestic situations. While the overall trend looks promising, continual monitoring and course correction will be necessary.
The final test of this budget will be its ability to drive long-term growth while addressing structural inequity. As India prepares for global leadership, the policies outlined in this budget may determine the trajectory of its economic development for many years to come.
Abhimanyu Kumar is an Analyst at IFSA Hansraj
Adhiraj Ahuja is an Analyst at IFSA Hansraj
Akshit Khurana is an Analyst at IFSA Hansraj
Rajat Soni is an Analyst at IFSA Hansraj
Rewa is an Analyst at IFSA Hansraj
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