The Hindu Editorial Analysis- 3rd February 2025 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Beyond Tax Cuts, a Closer Read of the Union Budget

Why is it News?

Union Finance Minister Nirmala Sitharaman presented the Union Budget on February 1, 2025, amid significant economic challenges. 

Backdrop of the Budget

• The budget is set against a backdrop of high taxes, unemployment, slow private investment, external vulnerabilities, and fiscal concerns.
• It focuses on the vision of Viksit Bharat, with policies covering various sectors such as agriculture, manufacturing, MSMEs, social welfare, and infrastructure.

Fiscal Targets and Concerns

• The budget aims for a fiscal deficit of 4.4% of GDP in FY26, relying on ambitious growth targets for tax revenues.
• However, these projections are seen as overly optimistic due to potential tax cuts and a slowing economy.
• The budget includes a second asset monetisation plan (2025-30) to generate funds, although past failures raise doubts about its success.
• Estimated net market borrowings of ₹11.54 lakh crore may crowd out private investments, especially during a period of weak credit demand.
• Achieving fiscal targets will require improved tax efficiency and better asset monetisation strategies.

Tax Reforms and Revenue Losses

• The budget revises personal income-tax slabs, exempting incomes up to ₹12 lakh (after rebate), providing relief to the middle class.
• However, this change results in a significant revenue loss of ₹1 lakh crore, potentially impacting government funding for development projects.
• Household savings have declined to 18.4% of GDP in FY23, raising concerns about long-term economic stability.
• The sustainability of tax cuts is questionable, given the need for public investments in infrastructure and social welfare.

Manufacturing and MSME Sector

• The budget aims to boost India’s manufacturing sector, which currently contributes only 17% to GDP.
• Production-Linked Incentives (PLIs) have had moderate success but require further support to be effective.
• Enhanced credit facilities for MSMEs and the introduction of a National Manufacturing Mission are positive steps to support this sector.
• Changes in MSME classification, including a 2.5 times increase in investment limits and a doubling of turnover thresholds, may help businesses scale up.
• However, deeper issues such as regulatory inefficiencies, infrastructure gaps, and low innovation spending (currently at 0.64% of GDP. remain unaddressed.
• The lack of focus on industrial research and development limits India’s competitiveness compared to countries like China and Germany.

Agriculture Sector Initiatives

• The budget introduces several initiatives aimed at improving productivity and climate resilience in the agriculture sector.
• These include the Prime Minister Dhan-Dhaanya Krishi Yojana and the National Mission on High-Yielding Seeds.
• Additionally, the Kisan Credit Card (KCC) loan limit is increased from ₹3 lakh to ₹5 lakh, providing greater financial support to farmers.
• The focus on 100 low-productivity districts signifies a shift towards precision support, moving away from blanket subsidies.
• However, the budget falls short in addressing critical issues such as inefficiencies in agricultural markets, price volatility, and the need for export growth.
• Notably, there are no measures to enhance exports of millet and organic farming products, representing missed opportunities for boosting the sector.

Challenges in External Trade

• Exports in the IT and business process outsourcing (BPO) sectors continue to grow at a rate of 10.5% CAGR, but there is a need for greater diversification in export markets.
• Initiatives like Bharat Trade Net (BTN) and export credit support for MSMEs are positive developments, yet they lack the scale necessary to significantly reduce trade deficits.
• The declining value of the rupee and diminishing foreign exchange (forex) reserves underscore the urgency for a stronger export strategy.
• A shift towards value-added sectors such as pharmaceuticals, electronics, and renewable energy could enhance India’s global competitiveness and improve trade balances.

Climate and Clean Energy Measures

• The budget includes various measures to support supply-chain resilience in the context of climate and clean energy.
• These measures encompass incentives for lithium-ion battery recycling, duty exemptions on critical minerals, and initiatives to promote domestic manufacturing of solar PV and battery technologies.
• However, important aspects such as grid modernization, energy storage solutions, and industrial decarbonization are not adequately addressed in the budget.
• The lack of comprehensive strategies in these areas raises concerns about the effectiveness of India’s transition to a low-carbon economy, which may remain fragmented without targeted interventions.

Conclusion: Trade-offs in Growth Strategy

• The budget attempts to strike a balance between fostering private enterprise growth and ensuring inclusive development.
• It aims to boost consumption while maintaining savings and overall macroeconomic stability.
• The success of these initiatives will largely depend on effective execution and the government’s ability to adapt policies as needed in response to changing economic conditions.

A Budget that is forward-looking and growth-oriented

Why in News?

The Union Budget for 2025-26 continues the government's approach of promoting economic growth, maintaining fiscal discipline, and supporting various sectors.

Key initiatives include:

• Reductions in personal income tax
• Increases in capital expenditure
• Support for the manufacturing sector
• Targeted incentives for sectors that create jobs

Impact of Personal Income Tax Cuts

One of the most significant aspects of the Budget is the complete exemption from personal income tax for individuals earning up to ₹12 lakh annually.

• For salaried taxpayers, this exemption is extended to ₹12.75 lakh, thanks to a standard deduction of ₹75,000.
• This change is expected to increase disposable income, leading to a boost in consumption and overall economic activity.

The anticipated results of these tax cuts include:

• Higher demand for goods and services
• Improved business performance
• Increased collections of indirect taxes

Key industries that are likely to benefit from this increase in demand include:

• Retail
• Real Estate
• Automobile Manufacturing

As these industries grow, they will create more employment opportunities, further stimulating the economy.

Capital Expenditure Increase

The Union Budget for 2025-26 has allocated ₹11.2 lakh crore for capital expenditure, marking a 10% increase from the previous year. This increase in capital expenditure is expected to have several positive impacts:

• Enhanced Infrastructure Development: The increased budget will allow for significant improvements in infrastructure, which is crucial for economic growth. Better infrastructure facilitates business operations, reduces costs, and attracts investments.
• Job Creation: Higher capital expenditure is likely to lead to the creation of numerous jobs, both directly and indirectly. Infrastructure projects require a large workforce, and the resulting improvements can boost employment in various sectors.
• Stimulation of Economic Activity: With more funds allocated for capital projects, there will be a ripple effect on economic activities. Construction, logistics, and related industries will see increased demand, further driving economic growth.
• Long-term Sustainable Growth: Investments in logistics and industrial sectors will contribute to sustained economic growth. Improved logistics efficiency can lower costs and enhance competitiveness, while a robust industrial base is essential for manufacturing and exports.

National Manufacturing Mission

The National Manufacturing Mission, introduced in the Union Budget 2025-26, aims to bolster the 'Make in India' initiative by focusing on:

• Small, Medium, and Large Industries: The mission will provide policy support, execution roadmaps, and governance frameworks tailored to different industry sizes.
• Enhancing Domestic Manufacturing: The objective is to strengthen domestic manufacturing capabilities, making India less reliant on imports and more self-sufficient.
• Attracting Foreign Investment: By streamlining regulations and offering incentives, the mission aims to make India an attractive destination for foreign investors.
• Reducing Import Dependency: The focus will be on producing goods domestically that are currently imported, thereby reducing the trade deficit and improving the balance of payments.
• Global Manufacturing Hub: Ultimately, the mission seeks to position India as a global manufacturing hub, capable of competing with other manufacturing powerhouses.

Support for Labour-Intensive Sectors

The Union Budget 2025-26 places a strong emphasis on job creation in sectors that are vital for India's economy. The following labour-intensive sectors are prioritized:

• Tourism: With targeted incentives, the government aims to boost tourism, which can significantly contribute to employment and foreign exchange earnings.
• Food Processing: This sector is crucial for enhancing agricultural productivity and reducing wastage. Incentives will focus on improving efficiency and competitiveness.
• Leather Industry: The leather industry is a significant export earner and job provider. Support measures will aim to enhance productivity and global competitiveness.

These sectors are not only important for domestic employment but also play a significant role in India's export earnings. The Budget's focus on these areas through targeted incentives and regulatory reforms is expected to:

• Improve productivity
• Enhance competitiveness
• Create more job opportunities

Maritime and Aviation Development

The Union Budget 2025-26 includes several initiatives aimed at boosting the maritime and aviation sectors, which are expected to create economic opportunities in emerging growth centers across the country:

• Maritime Development Fund:. new fund has been announced to enhance the marine economy, benefiting coastal states. This initiative aims to promote sustainable development and utilization of marine resources, potentially leading to job creation and economic growth in these regions.
• Expansion of the UDAN Scheme: The UDAN (Ude Desh ka Aam Naagrik) scheme, which aims to enhance regional air connectivity, is being expanded to include 120 new destinations. This expansion is expected to improve flight connectivity to underserved areas, promoting tourism, business travel, and economic development in these regions.

Prime Minister Dhan-Dhaanya Krishi Yojana

The Prime Minister Dhan-Dhaanya Krishi Yojana is an initiative aimed at boosting agricultural productivity and improving rural livelihoods in India. Here are the key features and focus areas of the scheme:

• Target Areas: The scheme will be implemented in 100 districts that currently experience low agricultural productivity and have limited access to credit facilities. The selection of these districts will be in partnership with state governments to ensure local relevance and effectiveness.
• Crop Diversification: Encouraging farmers to diversify their crop patterns to include a variety of crops beyond traditional staples. This can help in increasing resilience against climate variability and market fluctuations.
• Sustainable Farming: Promoting practices that enhance soil health, conserve water, and reduce the environmental impact of farming. This could include organic farming, agroforestry, and integrated pest management.
• Improved Irrigation: Investing in efficient irrigation systems to ensure reliable water supply for crops. This is crucial in regions prone to water scarcity and can significantly boost crop yields.
• Post-Harvest Storage: Enhancing facilities for storing harvested crops to reduce wastage and ensure better prices for farmers. Improved storage can help in managing supply and demand more effectively.
• Credit Access: Facilitating better access to credit for farmers to invest in necessary inputs and technologies. This is vital for improving productivity and sustainability in agriculture.
• Beneficiary Impact: The scheme is expected to benefit around 1.7 crore farmers, significantly boosting their productivity and incomes. This increase in rural purchasing power is likely to have positive spillover effects on related industries, such as agro-processing, retail, and rural services.

Fiscal Deficit Reduction

The government has set a plan to reduce the fiscal deficit from 4.8% in 2024-25 to 4.4% in 2025-26. This reduction in fiscal deficit is expected to have several positive impacts on the economy:

• Stabilizing Inflation:. lower fiscal deficit can contribute to stabilizing inflation by reducing the overall demand in the economy. This is because a smaller deficit often means less government spending, which can help in controlling price rises.
• Increasing Investor Confidence: Reducing the fiscal deficit signals to investors that the government is committed to maintaining fiscal discipline. This can boost investor confidence, leading to increased investments in the economy.
• Strengthening the Macroeconomic Environment:. lower fiscal deficit can strengthen the overall macroeconomic environment by improving the country’s credit rating and reducing borrowing costs. This creates a more stable environment for businesses and investors.

Ease of Doing Business Reforms

The Budget introduces several reforms aimed at improving the ease of doing business in India, particularly in the area of tariff structure and taxation:

• Simplification of Tariff Structure: The government has simplified the tariff structure by removing seven tariff rates. This simplification is expected to make the tariff system more transparent and easier to navigate for businesses, reducing compliance burdens.
• Fair Taxation: The Budget ensures that no more than one cess or surcharge is levied on goods and services. This measure aims to make taxation fairer and more predictable, helping businesses plan their costs better.
• Addressing Inverted Duty Structures: The issue of inverted duty structures, where the tax on inputs is higher than the tax on finished goods, has been addressed. This reform is expected to enhance trade competitiveness and encourage greater participation of domestic firms in global supply chains. By reducing distortions caused by inverted duty structures, businesses can operate more efficiently and competitively.

Conclusion

The Budget for 2025-26 emphasizes capital expenditure, manufacturing, and labour-intensive sectors while maintaining fiscal discipline and providing tax relief. This sets a strong foundation for economic growth. Although the detailed implementation of the proposed schemes is yet to be seen, the overall approach of the Budget is proactive and geared towards fostering growth. Businesses and stakeholders will need to evaluate and adapt to these measures as they are rolled out, with the full impact becoming evident over time.