30 Under 30 2025

Will the Union Budget boost the economy?

Crisil Intelligence unpacks key budget announcements around the capex thrust, fiscal deficit and consumption boost

Published: Feb 3, 2025 01:16:36 PM IST
Updated: Feb 3, 2025 02:45:46 PM IST

A housing project in Kolkata, India
Image: Debarchan Chatterjee/NurPhoto via Getty ImagesA housing project in Kolkata, India Image: Debarchan Chatterjee/NurPhoto via Getty Images

The union budget was presented against the backdrop of a slowdown in real gross domestic product (GDP) growth to 6.4 percent in fiscal 2025 from 8.2 percent previous year with investment growth slowing and consumption recovering on weak legs. The budget has tried to support both these demand side drivers, while also sticking to the fiscal consolidation path (targeting fiscal deficit at 4.4 percent of GDP in fiscal 2026, down from 4.8 percent in fiscal 2025). Beyond fiscal 2026, the government has made debt-GDP ratio as the main anchor for fiscal consolidation and aims to attain central government debt-GDP at 50(+/-1) percent by fiscal 2031.

 

Consumption boost: The key push to consumption in the budget comes from reduction in tax burden for the middle class under new tax regime. About 72 percent of the income taxpayers have adopted this regime. The announcements provide relief by increasing the tax exemption limit to Rs12 lakh from Rs7 lakh, meaning people earning up to Rs12 lakh have nil income tax, which would lead to tax savings of Rs80,000 annually for them. To be sure, middle-class consumption suffered in fiscal 2025 hit by high interest rates and high food inflation.

 

Higher allocations for key infrastructure and employment creating schemes---such as Pradhan Mantri Awas Yojana (PMAY) to Rs78,126 crore (64.1 percent higher on-year), Pradhan Mantri Gram Sadak Yojana (PMGSY) to Rs19,000 crore (31 percent higher on-year), and maintaining the allocation for Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) at Rs86,000 crore---should support incomes and consumption in fiscal 2026. The total allocation for these schemes rose 23.7 percent on-year after remaining stagnant in fiscal 2025.

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Capex thrust: Capex for fiscal 2026 is budgeted at Rs11.2 lakh crore, up 10 percent from Rs10.2 lakh crore in fiscal 2025 revised estimates (RE) i.e. the government has maintained its capex support at 3.1 percent of GDP in fiscal 2026, same as in fiscal 2025. At the same time, grants-in-aid (GIA) for creation of capital assets are budgeted to increase substantially to Rs4.27 lakh crore, from Rs2.99 lakh crore in fiscal 2025 RE, a rise of 42.4 percent. This means the effective capital expenditure through the budget rises to Rs15.5 lakh crore, from Rs13.2 lakh crore (up 17.4 percent).

Also read: Budget 2025: Government unleashes IT relief cannonball to aid consumption; there's little else for growth

 

The government has budgeted an IEBR (capex) of Rs4.3 lakh crore for fiscal 2026 compared with Rs3.8 lakh crore this fiscal. This means the Centre’s total capital infusion in the economy (budgetary support + IEBR) has got a boost, rising to 5.5 percent of the GDP, from 5.2 percent in fiscal 2025.

The government’s plan to provide growth support while continuing fiscal consolidation rests on moderation in revenue expenditure (pensions, food and fertiliser subsidies). Revenue expenditure as a share of GDP is expected to decrease to 11.0 percent from 11.4 percent in fiscal 2025. Also, the budget expects support from improved tax buoyancy and robust non-tax collections, led by higher RBI dividends. That said, disinvestment target of Rs0.47 lakh crore for fiscal 2026 appear realistic as it has only been achieved once in last five years.

 

Finally, the fiscal deficit will be financed majorly (73.5 percent) through market borrowings with gross borrowings of dated securities pegged at Rs14.8 lakh crore in fiscal 2026, marginally up from Rs14 lakh crore in fiscal 2025.

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