Fiscally Fit

A GOVERNMENT’S BUDGET is primarily about fiscal policy—how the government earns its resources and how it spends. Economic growth has more components. Nirmala Sitharaman has a knack for getting the big things right. Macroeconomic stability has been a standout feature of the Modi governments. As has been the use of fiscal policy to support growth. It isn’t easy to achieve what the finance minister has over the last six years.

Consider all that has been done. On the revenue side, there was a cut in corporate tax rates in Sitharaman’s very first Budget in 2019, bringing them to levels comparable with competitor countries. Her first full Budget of Modi 3.0 has brought a deep cut in income taxes, with a very large section of taxpayers now liable to pay no tax. Others also get a lesser burden. Both sets of cuts in 2019 and 2025 were aimed at the two biggest engines of growth— private investment (30 per cent of GDP) and private consumption (60 per cent of GDP).

But her record as finance minister hasn’t simply been about tax cuts. There have been significant increases in expenditure. During Covid-19, government spending was greatly enhanced to meet the needs of an economy at a standstill. But it was done responsibly— no splurge of the kind seen in advanced economies which had the serious side effect of rampant inflation. As the pandemic eased, the finance minister returned to the path of fiscal consolidation, over-achieving her most recent target of 4.9 per cent of GDP by delivering 4.8 per cent in this Budget. Within the overall spending, there has been a clear shift towards more capital expenditure which is productive, and reducing the share of the less productive revenue expenditure.

The finance minister’s fiscal stance has been responsive to the needs of the economy without being inflationary. It has also kept in mind the principle that it is the private sector that must drive the economy rather than the government. This is important and is reflected in her latest Budget. For the last few years, capital expenditure has been a key driver of economic growth but in 2024-25, it has been pared back by 10 per cent. The pared-down level will be maintained next year. It is a courageous move at a time of slowdown but it recognises that fiscal policy cannot drive an economy of India’s size over the medium term. That has to be done through the private sector which is the much bigger part of the economy. Therefore, it is the right strategy to put more money into the hands of consuming households. When they spend more, it will also spur private investment, creating a virtuous cycle.

Some may ask why the economy is not growing faster if the government is getting the big things right. The devil lies in the small things that are beyond the finance minister’s control. Issues such as availability of land for industry, flexible labour laws, faster approvals, and cheaper power require a whole government effort—actually a whole of governments’ effort, Centre and states. The Budget has recognised the importance of the small things and a high-level committee is going to comb through all non-financial sector regulations to recommend changes.

The other policy that needs a relook is related to fiscal policy but is off-Budget, namely GST. Again, the government got the big picture right by introducing GST in 2017. But the system has inched towards more, not less, complexity over time. With the support of states, rationalisation of rates and processes can give a huge boost to growth.

What matters for growth are production and productivity. Lower taxes will help both. And a higher growth rate will deliver greater revenue. The finance minister has got this spot on. Now, with a little effort on some small things, India can get a big transformation.

consumptionFinance Minister Nirmala SitharamanOpenomics 2025responsible budgetretail inflationUnion Budget 2025