The Union Budget 2025-26 comes at a time when there are clear signs of the economy slowing down. Unlike earlier, this slowdown is finally being acknowledged by the government. The Economic Survey, presented a day earlier, was clear in its assessment of the challenges facing the Indian economy. The most important being the slowdown driven by stagnant or declining incomes. The survey also presented evidence that confirmed the decline in the incomes of the self-employed, while for wage workers, it is now almost a decade of stagnant real wages. What was expected from the budget was some ideas to revive the economy based on this reality. While the budget did not have any new ideas to do so, its prescriptions are based on political pragmatism rather than economic reality. The elections in Delhi and Bihar, along with the need to satisfy the core voters of the ruling dispensation — the middle class — have taken precedence over the economic reality of an economy in distress, primarily in rural areas and in agriculture.
Given the seriousness of the economic slowdown, what was needed was an increase in public expenditure to boost aggregate demand. The nominal GDP growth is likely to be 10.1 per cent with inflation staying in the four-five per cent range. The growth of budgeted expenditure at 7.3 per cent is lower than the expected nominal GDP growth. Excluding interest payments, which are committed expenditure, growth in government spending is only 5.9 per cent, the same as last year. On the other hand, the Centre’s gross as well as net tax revenue is projected to increase at 10.9 per cent in nominal terms. This is despite the massive Rs 1 lakh crore tax giveaway to the middle class. Clearly, far from being an expansionary budget, this is a conservative budget at a time when the government was expected to step up and expand fiscal spending to increase incomes across the board.
While this has allowed the Centre to reduce its fiscal deficit for next year to 4.4 per cent, it has been achieved by expenditure cuts in real terms for programmes and ministries that needed the fiscal expenditure. The budget estimates also suggest that in many of the important ministries, revised expenditure has been lower than what was budgeted last year. This has been a general trend for some time now with larger allocations during the budget announcements, but lower actual expenditure.
Take the case of expenditure on rural development. The revised estimates for the Ministry of Rural Development are lower by Rs 3,654 crore compared to the budgeted estimates. In the case of the Ministry of Labour and Employment, the revised estimates are lower by Rs 4,224 crore. Given the fact that rural areas have been in distress for almost a decade and unemployment has emerged as the most pressing problem, underspending on crucial programmes and ministries is a cause for worry. The case of MGNREGA, which has been a lifeline for many struggling with stagnant wages and lack of productive employment, is similar. The budgeted expenditure for MGNREGA remains Rs 86,000 crore, the same as last year despite inflation and wages under the scheme having gone up. This expenditure is in fact lower than the actual spending on MGNREGA in 2023-24 (Rs 89,368 crore).
The other crisis-ridden sector that was talked about at great length and as the first priority is agriculture. Even in agriculture, there is now enough evidence to suggest that incomes have been stagnant or in decline. For agriculture, the nominal expenditure is in fact lower than the revised estimates of last year. The budgeted expenditure is Rs 1,27,290 crore as against the revised estimate of Rs 1,31,195 crore of last year.
While a significant majority of workers who are facing stagnant or declining incomes have seen expenditure cuts, the government has rejigged the tax rates to reduce the burden on the middle class, along with tax exemptions for all those with incomes up to Rs 12.75 lakh. For the government, this appears to be the only idea for reviving demand. While it will certainly increase the disposable income of the well-off middle classes, its impact on reviving the weakening consumption demand in the economy is a matter of speculation.
This move by the government was not surprising given the media noise on the middle class being the biggest victim despite the fact that the distress was more severe in rural areas, in agriculture and among informal enterprises and workers. This is nothing but a cash transfer to the relatively rich when the need was to increase fiscal spending, which could benefit a large majority by increasing their incomes. But this is not the first time that the government has placed its bet on the middle class and the rich. In some ways, it is similar to the government’s largesse to the corporate sector during the first episode of the slowdown. A tax subsidy of more than Rs 2 lakh crore to the corporates was utilised to clean their balance sheet rather than increase investment in the economy. Since then, the government, and in particular the Chief Economic Adviser, has expressed disillusionment with the corporate sector, which has used the subsidy to increase profits and reduce the wage bill, but failed to increase investment or create jobs.
With a significant majority of the middle class increasing its exposure to loans of all kinds — personal, with or without collateral — during the last four years, it is likely they may also take the opportunity to clear their existing debts and mortgages rather than spend on goods and services. Whether the middle class will join the ranks of the corporates and fail to deliver on the promise or will bail out the government will only be known in due course. But for the majority who have to pay the price through expenditure cuts and worsening distress, this budget is clear evidence of the political economy priorities of the government.
The writer is associate professor, Centre for Economic Studies and Planning, JNU
