A Fine Balance

IN BUDGET 2025, Finance Minister Nirmala Sitharaman attempts to bring a balance between good politics and good economics. Its headline decision, of raising the applicabil­ity of income tax to ₹12.75 lakh for the salaried, has changed the economic mood of middle-class voters, though how it played out on February 5, when Delhi went to polls, re­mains to be seen. Freebies becoming the centripetal political force for electoral economic actions have pushed the already taxed to the fringes of financial justice. The past few Budgets had become instruments of policy expropriation of the few for the benefit of the many. “Wasteful,” say aggrieved taxpayers. “Necessary,” argues the political class.

As a result, Sitharaman’s eighth Budget also illustrates the conflict between democracy and capitalism, through the clash of freebies and freedom. The democratic race to the bottom has proved that freebies work. From Tamil Nadu to Himachal Pradesh, the fight for the mind of the voter has degenerated into an irreversible dive into a black hole of personal finances at the cost of public finances. As far as capitalism goes, if Prime Minister Narendra Modi’s authorship of aspiration—to be a developed economy, Viksit Bharat, by 2047—is taken seriously, it needs a bullet train to economic freedom, which the Budget sidesteps.

It frees a majority of existing taxpay­ers from paying taxes and through it fore­goes revenue of ₹1 lakh crore. It provides a healing touch to the middle class and attempts to turn it into a new political constituency by creating household good­will. This increase in the applicability of tax has been a work in progress—in 2014, then-Finance Minister Arun Jaitley raised it to ₹2.5 lakh; in 2019 and 2023, Sitharaman raised it to Rs 5 lakh and ₹7 lakh respectively.

The ₹80,000 of additional income in the hands of those earning Rs 12 lakh per annum, or ₹1,10,000 for those making ₹50 lakh, can head in two directions. Households can spend that money. And if stock markets are to be believed, this money is headed towards fast moving consumer goods, consumer durables and real estate—the three sectoral indices on the BSE rose up to 3 per cent following the Budget, even as the rest of the market remained flat. The first two are no-brainers; the last is expecting some of the money to turn into equated monthly instalments. So, we can expect a consumer-driven growth path in the short term.

Alternatively, this money can be saved in banks or invested in debt and equity instruments. Here, the systematic investment plans (SIP) of mutual funds could see a rise in equity markets. At ₹2.11 lakh crore in the first nine months of the current financial year, they had already crossed the total of what investors put during the entire previous financial year (it was ₹1.99 lakh crore in fiscal 2023-24). These investments, through banks or equity markets, could find their way into the mainstream economy.

The second message the Budget delivers is to economists and analysts. It says that despite giving this benefit, the Budget remains fiscally responsible. On a reduced fiscal deficit estimate of 4.4 per cent for fiscal 2025-26 and a reduced 4.8 per cent for the previous year, Sitharaman has been able to keep politics and economics in equilibrium. The fiscal deficit had risen to 9.2 per cent in the post- Covid Budget of 2020. But since then, she has been conscientiously reducing it—to 6.8 per cent in Budget 2021, 6.4 per cent in Budget 2022, 5.8 per cent in Budget 2023, and 5.1 per cent in Budget 2024.

This is not as easy as the figures show. It requires deep thinking to be politically generous and fiscally sensible. As the longest-serving guardian of the Ministry of Finance, and despite several stumbles, suchasaroundtaxcollectedatsourceorthe unfair personal attacks she has faced due to a progressive Goods and Services Tax (GST), Sitharamanhassetnewstandardsin economic management. That said, the glide path to 3 per cent in an economy where expenditures are rising but growth is slowing may not be as smooth as spread­sheets may like.

Of the three major revenue receipts for Union Budgets—GST, corporation tax, and individual income tax—the last has been growing the fastest. In a perverse manner, this can be seen as an indi­cator of prosperity: greater the income of the few, higher the taxes collected. But it also exposes an injustice. Eight years ago, GST contributed almost a quarter (23 per cent) to exchequer re­ceipts, corporation tax almost a fifth (19 per cent) and individu­als one-sixth (16 per cent). Since then, there has been a trend reversal. In Budget 2025, GST contributions at 18 per cent and corporation taxes at 17 per cent have become lower than those of individual taxpayers at 22 per cent. (GST at 18 per cent is still higher than individuals at 16 per cent eight years ago.)

Worse, of the 98 million middle-class households (earning between ₹5 lakh and ₹30 lakh), only 15 million pay income tax; according to estimates, tax avoiders or evaders in this band do not pay taxes worth ₹7.8 lakh crore. Likewise, the rich, who earn more than ₹30 lakh, evade or avoid taxes worth ₹23.4 lakh crore. So, in­creasing tax revenues from a shrinking constituency of individual taxpayers displays political celebrations at the cost of economic justice. The fair thing to do would be to expand the tax base.

For context, in the US, Germany or China, individuals start paying taxes with even one unit of earnings; in Nigeria at 5.5 per cent of per capita income (PCI); in Brazil 9.2 per cent of PCI; in Japan 43.6 per cent of PCI. In India, the number is 162.9 per cent of PCI. What is so special about our country that only a tiny minority must be burdened with taxes? George Orwell’s Boxer in Animal Farm comes to mind.

The ‘trust’ Sitharaman proposes to infuse into the new Income Tax Act needs to play out in greater numbers, more so because the size of Union Budgets has been increasing at the rate of 11.5 per cent per annum over the past 11 years— it stands at ₹50.65 lakh crore and shows no sign of downsizing. Add the looming Pay Commission, and watch expenditure on salaries and pensions of the already high-earning government servants jump in Budget 2026. Clearly, Sitharaman’s next three Budgets need to focus on pruning expendi­ture while expanding the tax base.

Finally, Budget 2025 is geoeconomically sensitive. It lays the foundations for forthcoming conversa­tions between Prime Minister Modi and US President Donald Trump. Reducing duties across 80 products and removing seven tariff lines, including on mo­torcycles, is a strategic decision, considering this is what Trump had sought in his previous term. Sitharaman has created the space for tariff negotia­tions. Given the seriousness of Trump’s actions, as he has raised tariffs on Chinese, Canadian and Mexican imports recently, this is a good step from the world’s fifth-largest economy talking to the world’s largest. Sitharaman has ensured that New Delhi will not be on shaky ground when engaging with Washington.

The one thing that is confusing is that al­though Budget 2025 talks about ease of doing business and cites the forthcoming Jan Vish­was 2.0 as a tool, it does not go deep enough. For context, Jan Vishwas 1.0 decriminalised 113 imprisonment clauses; Jan Vishwas 2.0 will de­criminalise another 100. Of the 5,126 imprison­ment clauses that businesses have to face from the Union government, this is not even the tip of the iceberg which needs to melt and the government should heat up the process. The easy way would be to notify the four Labour Codes that have been passed by Parliament. But that alone will not serve the purpose. Other ministries need to add their weight to show India is a serious economy for doing business. If the US is pushing for MAGA (Make America Great Again) and the European Union (EU) is fol­lowing through with MEGA (Make Europe Great Again), India that began this journey earlier must show leadership through MIGA (Make India Great Again). But again, this reluc­tance could simply be a symptom of India’s political economy.

Overall, what Sitharaman has shown is that when push comes to shove, she can be financially generous, economically sound, and politically astute. This line of action must continue and other arms of the government must add their weight to en­sure India remains the world’s fastest-growing economy and most attractive destination for doing business.

Donald Trumpeconomic reformsFinance Minister Nirmala SitharamanIncome TaxNarendra ModiOpenomics 2025revenueUnion Budget 2025