A long list of demands is normally made before the Budget. Surprisingly, it seems to have delivered on almost all expectations. One reason is the larger resources available in a growing economy and using them well. Continuing fiscal consolidation has reduced borrowing requirements.

A less than forecast growth in interest payments released some funds. That is why consolidation is important. Interest payments still eat up 19 per cent of revenue receipts. A fall in these will release funds for productive expenditure.

Consolidation yet capex

The fiscal deficit at 4.8 per cent of GDP was also less than the target of 4.9 per cent and is estimated to fall further to 4.4 per cent in FY26. After the pandemic, better quality of spending has been able to provide stimulus despite overall fiscal consolidation.

Capex is slated to increase at 10.1 per cent over the under-delivery last year (7.2 per cent increase compared to the 16.9 per cent promised). Was this dip due to elections or due to state capacity limits?

For public sector investment to continue to grow PPP has to be re-invigorated and public resources used as multipliers. There are plans for both, so we may see over-delivery in the next year.

Consumption stimulus

There was a demand for tax cuts to increase middle class purchasing power and consumption spending. The Budget delivers this second stimulus. Since income tax collections had overshot targets there was scope for some reductions. It was also fair since inflation had raised real taxes. The state has foregone ₹1 trillion of tax but income tax is still expected to grow at a healthy 21 per cent over BE.

Under the new scheme there is zero income tax up to ₹12 lakh income per annum and some restructuring of other slabs. In India large numbers are clustered at the lower end, with more entry into the middle class as poverty shrinks. As their incomes grow, many will escape tax.

Corporates who priced for and created products for these lower middle classes made large profits (an example is Reliance Fresh), while MNCs who focused on premiumization strategies complained of low demand. The Budget boost will add more heft to the low margin large volumes strategy.

States subjects

Agriculture is rightly given the first place among four engines of development identified. It has to restructure to supply and benefit from diversifying diets. With lower food price spikes monetary easing can be a third stimulus.

Among many schemes the speech mentioned improving production and supply efficiency of vegetables and fruits in partnership with States. The latter is very important for delivery. Last year there were double digit shortfalls in expenditure growth targets in effective capital expenditure and in rural development where States play a large role.

The emphasis on simplifying regulations is welcome as a fourth stimulus, but it also requires the States to be on board. The high level committee that is to be set up must keep this in mind. The Centre has already simplified many archaic laws but businesses do not find life to be any easier.

The simplification has to percolate down to the 2nd and 3rd tier of government reaching local officials who interface with firms. States are more open to reforms as they compete for GCC centres and the Budget speech mentioned coordinating with the States on this as well as on tourism facilities.

Given the many dimensions of possible coordination, the formal framework promised last year would have been welcome but is still missing. Many States have notified the new labour codes as well as agricultural marketing reforms. These could be taken forward.

Targeted expenditure, sops

Total expenditure on major schemes grew at 5 per cent last year and this is promised to continue (BE over BE), with double digit increase in allocations for health, rural and urban development. But to achieve results just resources are inadequate. Well-designed incentives and better public goods are an essential 5th stimulus.

There are many examples of these such as making facilities for MSMEs conditional on registration. Despite underutilization, perhaps due to elections, the ₹1.5 trillion is again made available for state capex.

Conditionalities helped sustain a 50bps rise in states capex despite a splurge on freebies. Power distribution reforms make an additional 0.5 per cent of GDSP borrowing available.

An investment friendliness index is to be created for States. Incentives for corporate investment come from creating more demand but sticks that penalize non-business income from idle funds are missing.

There are special funds to promote private innovation, education, including use of AI, skilling and development of cities. Innovative financial structures help deliver more from public resources.

For example, asset monetization, to reach ₹10 trillion over five years, converts public assets into resources to create more assets, while the privatized assets are run more efficiently. Public fund of funds bring in private funds that multiply reach and efficiency. Credit guarantee cover is extended for MSMEs and a partial credit enhancement facility started for corporate infrastructure bonds.

A digital public infrastructure, Bharat Trade Net, promises effective trade facilitation. The vast network of India Post is to be activated to offer a range of services to the rural economy. Simplifications announced in taxes and tariffs, all contribute to productivity.

The Centre’s budget has reconciled fiscal consolidation with providing varied types of stimulus. It has met demands for consumption stimulus without compromising on human and physical capital formation. A major reason it has been able to do this is the use of incentives to bring States and private enterprise on board and mechanisms to stretch public funds.

The writer is Emeritus Professor, IGIDR

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