ExplainSpeaking: Making sense of the Budget, and what it means for the economy

Most other macro parameters — unemployment rate to credit growth — are looking up, as the Economic Survey has said. Under such circumstances, the Budget had to essentially keep doing whatever it was doing to keep India on the “Viksit Bharat” path.

There is, however, an alternative view. In that world view, India’s nominal GDP growth — the GDP growth rate measured in today’s prices (that is, with inflation factored in) and the actual observed variable — is at 8%. This has been described as an “extremely weak” rate of growth, considering that 12% nominal growth each year has traditionally been the benchmark for India.

In fact, official data showed that the nominal growth was in the single digit in the last financial year as well, making it two years of anaemic growth. A weak nominal growth has several negative implications. Since revenue generation, borrowing and expenditures are pegged to the nominal growth rate, a weakness on this count often reduces the amount of money a government can raise in revenues and spend on schemes. Low nominal GDP also slashes the amount of money a government can borrow from the market. This is what is technically called the fiscal deficit and is always stated as a percentage of the nominal GDP. Weak nominal growth also implies weak growth in incomes.

Similarly, a low inflation rate — 2% is just half of the RBI target of 4% — may seem like a good thing on the face of it. But the fact is that for a developing economy such as India, a very low inflation rate is often a signal of economic weakness. It suggests a slack in consumer demand as well as in the employment (or labour) market.

Proponents of this view point to the weakness in rupee’s exchange rate — even when the US dollar itself is slipping against all the major currencies — the modest sales growth of corporate India and the flight of capital out of India — both by foreigners and Indians alike.

If this view is taken, then the job of the Budget was not just doing more of the same: It had to find a new strategy of growth.

Govt’s strategy until now

Since he came to power in 2014, governments led by Prime Minister Narendra Modi have repeatedly emphasised a view best captured by his “minimum government, maximum governance” slogan. This meant that the government would curtail its role in the economy, especially by cutting down its expenditures and borrowings. This, in turn, would make space for the private sector to play a leading role in determining India’s path to becoming a developed country by 2047.

To this end, the government has brought about several structural reforms — the introduction of Goods and Services Tax, the Insolvency and Bankruptcy Code, the historic corporate tax cut of 2019, and the provisioning of massive subsidies in the form of Production-Linked Incentive schemes.

At the same time, the government cut its borrowings — measured by fiscal deficit and revenue deficit — and, thus, left more loanable funds in the market for private firms to borrow at a lower interest rate (see chart 1).

Beyond containing borrowings, the government also did something even more difficult: Gradually switching its expenditure profile from an orientation towards day-to-day expenses (such as salaries) to building long-term productive assets, such as roads and bridges. This can be seen in chart 2. Revenue expenditure has fallen from a high of 81% of total expenditure in 2020-21 to less than 72% in the current year. In the same period, capital expenditure has risen from less than 13% of total expenditure to more than 23%. This essentially means that taxpayer money is increasingly being used for creating productive assets for the economy that will have a positive impact for years to come, instead of just paying annual salaries.

This strategy, however, did not work out as successfully as imagined. The private sector dithered in taking the lead and investing in fresh capacities because it did not see adequate demand among Indians. That, in turn, was because Indians were facing high inflation and low wage growth (if they were employed) or high unemployment. It did not help that unemployment in India increased with educational attainment — that is, it was higher among those with a Bachelor’s degree than among those who had just passed Class 8. And this tended to be the highest among the youth (those under 30).

As the 2024 Lok Sabha election approached, and in the immediate aftermath of a weakened mandate for the ruling BJP, the government focused on tax relief to boost low consumption. This led to steps such as raising the level of exemption from income tax — first for incomes up to Rs 7 lakh per annum and then to Rs 12 lakh per annum.

In 2025, the government also cut GST rates to kickstart a consumption recovery that was presumed to be the last piece of the puzzle towards unlocking the private sector’s interest in leading the economy. Despite these efforts, private investments are still below pre-pandemic levels.

What made matters worse was the effect of Trump’s tariffs — they hit smaller Indian businesses more than bigger corporations. The flight of capital out of India, despite strong growth on paper, meant that in US dollar terms, India has arguably grown slower than the US in 2025 — an economy that is eight times India’s size.

What does the Budget show?

There are two basic ways to analyse any budget. One is to treat it exactly as it is technically called — an annual financial statement of the government.

What matters the most in this framework is whether the government has shown fiscal discipline. In other words, the concern is whether it has stayed within the prudential norms of borrowing and tried to reduce the gap between what it spends and what it earns. Chart 1 shows the government has met its fiscal deficit target of 4.4% of GDP despite weak nominal growth.

For many observers, meeting this target is often more important than anything else in the Budget because this implies that there will be loanable funds for the private sector.

This brings us to the other way to look at the Budget — which is to go beyond just the maths and look at what happened to different sectors of the economy while the government met its all-important deficit target.

As former US President Joe Biden once said: “Don’t tell me what you value. Show me your budget and I will tell you what you value.”

A look under the hood shows that the fiscal deficit target was met by massively curtailing expenditures across several key areas. That’s because a weak nominal growth meant that the government’s revenue collection was not only much lower than what it had anticipated when presenting the Budget last year but also lower than the pace of nominal GDP growth. This means that the government’s tax buoyancy was below 1, which is a matter of concern on its own.

Chart 3 shows how the Revised Estimates (the estimates at the end of the year) for some of the key tax metrics lagged the Budget Estimates (the estimates at the start of the year). The government’s total receipts grew by just 6.7% when the overall economy grew by 7.4% (real GDP) in the current financial year. This shows the inadequacy of the tax system to raise enough revenues.

Making matters worse were increased outgoes on subsidies of fertilisers and food, apart from more-than-budgeted expenditures towards pensions and defence.

As a result, a whole host of expenditures had to be cut. The most important being capital expenditure, which grew by just 4% over the last financial year. Similarly, the government’s expenditures in some key sectors — such as health, education and social welfare — fell well short of the proposed outlays. Expenditure on urban development fell short by as much as 40% when compared to the Budget Estimates.

The strategy going forward

The Budget for the next financial year presumes a nominal GDP growth rate of 10%. That’s two percentage points higher than the current year’s figure but still considerably lower than past benchmarks. Further, considering that the Economic Survey expects real GDP to be around 7%, most of the increase in nominal GDP growth is likely to come in the form of higher inflation.

Given the weak prospect of nominal GDP, and how it hurts expenditures across the board, there was limited fiscal space for a “big-bang” announcement. The major change in this Budget is that after trying to boost consumption over the past three Budgets, the government is back to focusing on the supply side of the economy.

Most of the pronouncements are pointed interventions aimed at alleviating the economic stress in India’s manufacturing, especially in the micro, small and medium enterprises sector and in tier 2 and tier 3 cities. It is this landscape that was the worst affected, not just by domestic events since 2016 — such as demonetisation, the adoption of GST, the MSME financial crisis, and the pandemic lockdowns — but also by Trump’s tariffs and associated disruptions in supply chains.

Has the government managed to achieve the golden mean? Or has it missed an opportunity to provide a cohesive new economic strategy for India to deal with in an uncertain world?

Share your views and queries at udit.misra@expressindia.com

Take care,

Udit