Even With Fiscal Crunch, Modi's Budget Shows It’s Playing the Long Growth Game

The BJP, in an era of strained government finances, is mindful of business interests, writes Sanjeev Ahluwalia.

(Photo: The Quint)

Finance Minister Nirmala Sitharaman, post her nineth Budget on 1 February, Sunday, could take solace from Dr Manmohan Singh’s comment in 1991-92 that the quality of a Budget should not be judged from the response of the stock market.

Liz Truss, briefly Prime Minister of the UK in 2022, would disagree having been ousted by the decisive thumbs-down reaction when UK treasuries declined precipitously post a “growth” budget relying on unfunded giveaways. But she had provoked the God of Bond markets!

Sitharaman did no such thing.

The slide in domestic stock markets of about 1.5 percent was induced by a “Trumpian” 150 percent increase in the securities transaction tax for futures—albeit from low levels of 0.02 percent to 0.05 percent—and an increase of between 20 and 50 percent for options on the existing tax rate of 1.25 percent.

These tax rates appear negligible but meagre trade margins and the repetitive nature of the trading, makes the nominal tax paid add up significantly.

Speculation, often incorrectly conceived as a problem, is the lifeblood of a competitive financial market—and can be either a disrupter or a stabiliser.

The Bharatiya Janata Party (BJP), in an era of strained government finances, is mindful of business interests. So, this was a surprise move but not as bad as spooking the bonds market.

Taxpayers Spared, Imports Get a Boost

Whilst it is traditional to begin with the expenditure side of the Budget proposals, the real action this time is on the revenue side. The old Income Tax 1961 is being replaced by a new Income Tax Act 2025 which is more aligned with the motto of “trust and respect the taxpayer”.

Regulatory incentives are now offered for overseas Indians to send money home—and keep the Current Account Deficit low, with an eye to the stormy global waters in exports earnings.

Indians who buy foreign exchange to either fund education, health care, or travel abroad should smile. Their tax contribution at source would now be reduced from the prevailing 20 or 5 percent to just 2 percent.

Similarly, imported medicines for eight major diseases, including cancer, would now be exempt from customs duty. On other imported goods for personal consumption, customs duty is reduced from 20 percent to 10 percent, so go ahead and shop overseas!

This will force domestic producers to become more competitive.

Regulatory Liberalisation

Interest awarded by a tribunal in cases of accident insurance cases will now be free of tax. Payments for the supply of manpower—a burgeoning sector in the gig economy—will attract tax deducted at source (TDS) of 1 or 2 percent, the same as for other contracts.

A liberalised framework is proposed for filing returns. TDS for purchase of property from a non-resident now is against the buyer's PAN, doing away with the Tax Deduction Account Number (TAN). A one-time six-month scheme for full disclosure of foreign assets by returning Indians who were working or living abroad is offered.

Process rationalisation includes combining assessment and penalty proceedings. Assesses will be able to update returns filed even during the process of assessments. The framework for impunity from penalty and prosecution shall apply to underreporting as well as misreporting. Technical defaults shall attract only a fee, not penalty. The prosecution framework under the Income Tax Act is to be graded by the seriousness of the offence.

Indirect tax will have simpler processes and be responsive to problem-solving. Recognising unutilised capacity in SEZs, eligible manufacturing units will be allowed conditional sale to the Domestic Tariff Area (DTA) at concessional rates of duty. The basic excise duty shall be exempt on the entire value of biogas in CNG.

To assist in flagship manufacturing programmes, exemption from basic customs duty on import of capital goods is now available for:

• processing of rare minerals or manufacture of Lithium-Ion cells for batteries or for use in BESS systems

• all nuclear plants irrespective of size, with an eye to the small nuclear program

• parts and components imported for trainer and other civilian aircraft

• raw materials imported by defence units for maintenance, repair, and overhaul (MRO) of aircraft, and

• microwave components

To enable faster customs clearances, improved warehousing arrangements and unified cargo clearance by various government agencies to be implemented supported by an interconnected digital clearance window available by 2028.

Sound Macroeconomic Fundamentals but Tax Revenue a Worry

• Fiscal stability has been the leitmotif of the finance minister.

Nominal GDP growth of 10 percent is anticipated over the advance estimate for the GDP of Rs 357.14 lakh crore in the current financial year 2025-26. The fiscal deficit of 4.5 percent in 2025-26 is expected to reduce to 4.3 percent in 2026-27 and the existing public debt from 56.1 percent to 55.6 percent of the GDP, with a medium-term target of 51 percent by 2031.

• Revenue receipts lagging economic growth are a worry.

Tax receipts lag the expected 10 percent nominal economic growth by growing at only 7.1 percent over anticipated receipts in the current fiscal of Rs 26.75 lakh crore. Non-tax revenue receipts remain stagnant at Rs 6.7 lakh crore. Overall, revenue receipts grow at only 5.7 percent.

• Revenue deficit remains at 1.5 percent in 2026-27.

The government has accepted the recommendation of the XVI Finance Commission to transfer 41 percent of the divisible tax pool to state governments. In the next fiscal, transfers to state governments account for Rs 26.21 lakh crore—a 12 percent increase over Rs 23.36 lakh crore in the existing fiscal—and well ahead of anticipated economic growth.

The expenditure outlays appear huge from a plain reading of the Budget speech. But, often, projected outlays over five years are mentioned for major schemes. Only a close reading of the Budget document can uncover outlay in the next fiscal for each programme.

• Capital outlays preferred over revenue expenditure.

Capital expenditure this year is expected to be about Rs 11 lakh crore. For the next fiscal, Rs 12.21 lakh crore is proposed—a 10 percent increase, which is 3 percentage points higher than the increase in revenues. It is to the credit of the finance minister that revenue expenditure is set to increase by only 6.6 percent versus an increase of 10 percent in the capital outlay.

From Short-Term Strain to Long-Term Fiscal Balance

This Budget is long on detailing the individual allocations for programmes and on the minutiae of expected procedural and regulatory reforms. These are welcome.

But long-term fiscal sustainability requires sharper definition of work areas between state governments and the Union and compacts—forged collaboratively and diligently enforced—on governance, regulatory, and delivery standards.

The Union government overreaches when it conceives and funds 146 programmes, on top of the 45 programmes that it sponsors along with state governments. Regulatory discretion and close adherence to the constitutional division of powers and responsibilities can enhance efficiency in the use of tax revenues capital receipts whilst maximising services for citizens.

(Sanjeev Ahluwalia is distinguished fellow Chintan Research Foundation and was previously in the IAS and the World Bank. This is an opinion piece and the views expressed are the author's own. The Quint does not endorse or is responsible for them.)