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As always, the union budget for 2025-26 also has multiple themes and highlights. However, the direct tax concessions announced at the very end of the budget speech have grabbed much of the attention, for justifiable reasons though. Major equity market indices ended on a flat note on the day of the budget. The bond market’s response will be known once the market opens on February 3.
Fiscal consolidation
The government has shown its resolve to pursue the path of fiscal consolidation. Thanks to the buoyancy in direct and indirect tax collection, the revised estimate of the fiscal deficit for 2024-25 stands lower at 4.8 per cent of GDP vis-à-vis the budget estimate of 4.9 per cent. The other deficit parameters also indicate furtherance of fiscal prudence. Interestingly, the Central government’s establishment expenditure is the only major item on the expenditure side, whose revised estimate at Rs. 841762 crore has exceeded its budget estimate.
Revitalisation of the government’s capital expenditure is critical for accelerating private investment
The fiscal deficit for 2025-26 has been pegged at 4.4 per cent of the GDP, which is in line with the commitment made in this regard in the full budget for 2024-25 last year. As regards income, the estimates for GST and corporation tax seem realistic. The estimate for personal income tax implying a growth of 14.4 per cent vis-à-vis the revised estimate for 2024-25 looks a bit ambitious, particularly in view of the tax concessions announced in the budget that would entail a revenue loss of about Rs. 1 trillion.
However, the assumption of a conservative nominal GDP growth rate of 10.1 per cent underlying the budget estimates will provide some cushion to the government in 2025-26 in adhering to the budget estimates.
Even the cognoscenti have opined that the RBI should now do its bit to help the middle class by making sure that EMIs on consumer and home loans are reduced
The revised estimate of capital expenditure in 2024-25 at Rs. 1318320 crore was lower than the budget estimate by about 12 per cent. In view of this, doubts have been raised if the budget estimate of Rs. 1548282 crore for 2025-26 could be achieved by the government. This is important, because revitalisation of the government’s capital expenditure is critical for accelerating private investment.
Middle order’s wish list
Sharp fall in the equity market for over four months now, resulting in a 10-13 per cent drop in the major indices has left many retail investors, particularly the new entrants, deeply out-of-pocket and anguished. This sell-off has been widespread, affecting large, medium, and small capital companies across the board. The middle class, therefore, has one more wish to be fulfilled – a 25 basis point rate cut by the RBI at the conclusion of the next MPC meeting on February 7, 2025, followed by a similar one in the next meeting in April – which, it is believed, would reverse the sagging trend of the equity market.
Issuance of SGBs didn’t make any impact on the quantum of physical gold imported into the country
Even the cognoscenti have opined that the RBI should now do its bit to help the middle class by making sure that EMIs on consumer and home loans are reduced. Some have argued that the RBI should strengthen the ‘feel good’ factor engendered by the largest personal income tax rate cut in more than a decade to augment demand in the economy, which is crucial for boosting investment by the private sector.
However, not many seem to be seriously concerned about how realistic it would be to expect the MPC to slash the policy rate now under its inflation-targeting mandate when the headline CPI inflation continues to be stubbornly above the target of 4 per cent, and with core inflation showing a rising trend.
Woes of SGBs
A relatively minor point emanating from the budget is the government’s decision to discontinue the issuance of sovereign gold bonds (SGBs), which commenced in 2015. The last issuance was in February, 2023, with the outstanding amount at Rs. 4.5 lakh crore as on March 31 of the same year. The maturity amounts of SGBs, each with a tenor of 8 years and carrying a coupon of 2.75 per cent (subsequently reduced to 2.50 per cent), are indexed to the price of 24-carat gold, thereby giving the investors a similar rate of return feature as in the case of physical gold.
While it is perfectly normal for the RBI to transfer most of its seigniorage income to the government, what is being witnessed for the last few years is relatively high earnings of the RBI arising out of its increasingly high volume of intervention operations in the domestic foreign exchange market
Since the price of gold has increased continuously since 2015, with the current level being about 3.25 times higher vis-à-vis 2015, the actual cost of issuance of SGBs was very high (12-13 per cent) compared to 6-8 per cent in the case of an 8-year G-Sec during the last decade or so.
As per the revised estimates for 2024-25, an amount of Rs. 18500 crore was spent by the government for redemption of SGBs during the year. On the whole, SGBs turned out to be a costly experiment for the government. Contrary to the government’s expectations, issuance of SGBs didn’t make any impact on the quantum of physical gold imported into the country.
It is quite apparent that there is a dearth of understanding about India’s gold economy in the policy circles. Since the path-breaking liberalisation of the regime for import of gold in 1997, various measures to reduce the flow of the metal into the country were taken from time to time, beginning with the gold deposit scheme in 1998. Predictably, all have failed.
Rising significance of RBI’s surplus transfer
Reliance on profit/surplus transfers from government-owned banks, financial institutions and RBI would continue in 2025-26. The budgeted amount under this head is Rs. 2.56 trillion vis-à-vis the revised estimate of Rs. 2.34 trillion for 2024-25. To give a perspective, the ratio of these transfers to the net tax receipts of the Central government which was 4.5 per cent in 2023-24 rose to a little over 9 per cent in 2024-25. This was made possible by more than a two-fold increase in the RBI’s surplus in 2023-24.
There is a dearth of understanding about India’s gold economy in the policy circles
The budget estimate of the transfers for 2025-26 is also about 9 per cent of net tax receipts, implying thereby that the RBI’s surplus for 2024-25 would be close to Rs. 2.30 trillion, to achieve which the contribution of exchange gain would likely be very significant.
While it is perfectly normal for the RBI to transfer most of its seigniorage income to the government, what is being witnessed for the last few years is relatively high earnings of the RBI arising out of its increasingly high volume of intervention operations in the domestic foreign exchange market. This phenomenon is at odds with what happens in Central banks with comparable forex reserves. It does not augur well for the independence of the RBI.
Long-pending issues
Among other things, this budget can legitimately claim some accolades for addressing a few long-pending issues: One such is the proposal to introduce soon a new bill to repeal and replace the Income Tax Act, 1961. This will be close to half of the present law, in terms of both chapters and words. The government intends to make it simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.
Over the last 10 years or so, the income tax machinery in India has witnessed significant improvements in terms of efficiency, integrity and openness, which have been amply aided by the use of technology in a big way. Even the most ardent supporters of the Income Tax Act, 1961 and the associated procedure would agree that this law is not compatible with present-day requirements and realities. As is invariably the case, there are strong vested interests who want continuation of this law and the corrupt and arbitrary practices of the past. It is good to see that the present government is willing to spend some political capital to draw the curtains on it.
Another is the decision to involve the private sector in nuclear power generation in the country to meet the target of 100 GW by 2047. It is apparent that a good proportion of the generation will be provided by Small Modular Reactors (SMRs), for the indigenous development of which a Nuclear Energy Mission with adequate fiscal support being set up. As pointed out in the budget speech, meeting the target of nuclear power generation is a must for the country’s energy transition in order to meet the net zero goal 45 years from now.