Opinion Budget moves forward with future as focus but ducks key reforms
The conviction that the Modi government showed in signing FTAs needs replication when it comes to domestic economy and governance
One can certainly expect the Centre to act on the Finance Commission's recommendations on incentivising states to undertake much-needed power sector and subsidy reforms, apart from setting their fiscal house in order. THERE ARE several things to commend in Union Finance Minister Nirmala Sitharaman’s ninth full budget. First, the continued focus on fiscal consolidation. Sitharaman has achieved the budgeted 4.4 per cent of GDP target for 2025-26, despite a huge Rs 1.63 lakh crore shortfall in tax collections. For the coming fiscal year, she has targeted a fiscal deficit of 4.3 per cent. Alongside, there is an emphasis on bringing down the Centre’s debt stock from 56.1 per cent of GDP in 2025-26 to 55.6 per cent in 2026-27. Seen in the context of the deficit and debt to GDP ratios reaching 9.2 per cent and 61.4 per cent in the Covid year of 2020-21, this represents a remarkable commitment to fiscal prudence.
Second, this consolidation has taken place even as the Centre’s capital expenditure has more than doubled, from Rs 4.26 lakh crore to Rs 10.96 lakh crore between 2020-21 and 2025-26. For 2026-27, the capex has been budgeted at Rs 12.21 lakh crore. Simply put, the quality of government spending has improved with more money being allocated to growth stimulating avenues. Third, there is a well-meaning emphasis on scaling up domestic manufacturing in strategic and frontier industries such as biologics and biosimilars, semiconductors, electronics components, rare earth permanent magnets, and even shipping containers and tunnel-boring equipment — where China holds a dominant position. Fourth, the budget has welcome measures towards reducing tax litigation by replacing prosecutions with penalties and fines in the case of minor offences and technical defaults. This has been accompanied by liberalising the safe harbour provisions involving transfer pricing in transactions between related entities. For IT services companies, the threshold for availing them has been raised from Rs 300 crore to Rs 2,000 crore, and also has been made an automated rule-based process without any tax officer involvement.
THAT SAID, this budget makes a misstep, while also being a missed opportunity. At a time when India’s equity market is hugely under-performing relative to its emerging market peers and there is outflow of money from foreign portfolio as well as direct investors, raising the securities transaction tax on futures and options was a bad idea. That the markets did not take kindly to it was reflected in the BSE Sensex closing 1,547 points lower or 1.88 per cent on Sunday. That the budget had no positive stimulus to offer — a cut in capital gains or last time’s mega income tax reliefs — did not help either.
Managing the economy is as much about managing sentiment in troubled geopolitical times. This was a budget that should have addressed the major concern flagged by the Economic Survey: What is causing foreign investors to pause, and “their reluctance to commit to India”? The Survey had called for aggressive disinvestment and even lowering the minimum state stake from 51 to 26 per cent for the purpose of defining a “government company”. The budget has little to offer on that, either. Nor does it have any proposals for rationalisation of subsidies. The combined outgo on food and fertiliser subsidy in 2025-26 stood at Rs 4.15 lakh crore, overshooting the budget estimate by Rs 43,307 crore. For the coming fiscal year, the bill has been pegged at Rs 3.98 lakh crore, which could well be exceeded without any moves to cap consumption of subsidised urea sales or open-ended procurement of wheat and rice. The question to ask is: When will the Narendra Modi government bite the bullet on privatisation and subsidy rationalisation? Hereon, the political space for taking hard decisions will, if anything, only recede.
THE HALLMARK of the Modi government has been that many of its consequential economic reforms have been announced outside the budget. This goes for the 2019 corporate tax cuts, the Labour Codes, and the recent reduction and simplification of GST rates. That, on the face of it, holds out hope of more purposeful measures and action in the days ahead. One can certainly expect the Centre to act on the Finance Commission’s recommendations on incentivising states to undertake much-needed power sector and subsidy reforms, apart from setting their fiscal house in order.
But the Union Budget matters a great deal in signalling the government’s priorities, be it to investors or society at large. For instance, one of the major issues shaping the perceptions about India, not to speak of affecting its citizens, is pollution. Couldn’t the budget have proposed, say, a large dedicated fund for tackling this menace within the overall capital expenditure allocation head? The conviction that the Modi government showed in signing free trade agreements with the European Union, UK, Australia and others needs replication when it comes to domestic economy and governance reforms, too.
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