A Dose of Tax Relief and Fiscal Consolidation

In the weeks preceding the Budget there was a clamour for tax relief for the middle class in India. In the event, the Budget delivered on that demand but it did not let that relaxation interfere with the larger goals of macroeconomic stability and continuing with the scorching pace of capital expenditure. It was as if an impossible trinity of sorts had been solved, almost magically.

For starters, the government has kept its promise of keeping the fiscal deficit in check. In 2025-26 fiscal deficit will shrink to 4.4% of GDP from 4.8% of GDP in 2024-24 (revised estimates), a shrinkage of 0.4 percentage points. At the same time, it is worth noting that interest payments as a percentage of revenue receipts in 2025-26 will be 37.31% almost identical with the figure last year (budget estimates) which stood at 37.16%

The secret behind this consolidation is the robust increase in government revenues. Gross tax revenue in 2025-26 is expected to increase by 11.2% over 2024-25. Interestingly taxes on income are the fastest growing category among taxes and are the single largest source of tax revenue. In 2025-26, taxes on income will be 33.67% of gross tax revenue. In 2024-25 (revised estimates), they constituted 32.6% of gross tax revenue and in 2023-24 this figure was 30.1%. The growth in taxes on income is also rapid. From 2023-24 to 2024-25 (revised estimates), these taxes grew by 20.31% and from 2024-25 to 2025-26 they are expected to increase by 14.4%. This is after the tax breaks being given to middle class taxpayers.

The hubbub over the tax proposals has not distracted the government from pushing ahead with its investment targets. Effective capital expenditure—the sum of capital expenditure and grants-in-aid for creation of capital assets—is budgeted to increase from Rs13.2 lakh crore to Rs15.5 lakh crore, an increase of 17.4%. But in 2025-26, the portion of grants-in-aid for creation of capital assets will grow faster as compared to the Centre’s own capital expenditure. The Centre’s own capex will grow by just one lakh crore from this fiscal to the next one. Perhaps a slower pace was the rational response to many factors, including the ability to absorb and spend such large sums continuously over the last five years. It is commendable that even with large social welfare spending the Narendra Modi government has not sacrificed capital expenditure that is usually axed in tough political situations. It speaks of the strength of this government that it has continued with its long-term vision of spending on physical and other infrastructure.

 

 

capital expenditureFinance Minister Nirmala Sitharamanmiddle classtax reliefUnion Budget 2025Web Exclusive