Budget 2025: Sleight of Hand and Twist of Fate

Sacrificing Rs 1 lakh crore in direct taxes to ease burdens on individuals can be a dangerous trade-off.

Union Finance Minister Nirmala Sitharaman presented her eighth Union Budget on 1 February 2025.

(Photo: Chetan Bhakuni/The Quint)

In what may be a case of optics over substance, the Union government seems to have chosen the easy way out with Union Budget 2025, tinkering with fiscal changes and procedural areas as quick fixes rather than opting for substantive, real reform.

The Budget comes with no structural changes, no bold decisions, even lacks the political courage to address the deep-rooted structural crisis strangling the economy, or even the stratified middle class.

Another round of tax rebates for less than four crore of the salaried class, which is five percent of the overall workforce, cannot be projected as a major solution to solve the issues faced by the larger middle-income community or may help multiply or boost growth.

A closer look at the numbers depicting the state of the economy tells the real story:

• Household savings have collapsed to a 47-year low, while household debt has hit a record 39 percent of the gross domestic product (GDP).

• Wage growth is stagnant at 0.8 percent for agricultural workers, 0.2 percent for non-agricultural workers, and negative for construction workers.

• Private consumption, the backbone of any economy, has plummeted to a 20-year low of 4 percent.

Reading the Fine Print

The Union government, while changing the tax slab rates, claims to put more money in people’s hands. But most of it, even if spent, is likely to go toward high-cost essentials (food, rent) and loan repayments rather than stimulating demand.

The government’s recent fiscal measures do provide an important signalling device and feel like a bold promise on paper, but for many on the ground, they ring hollow.

The government has chosen to forgo around Rs 1 lakh crore in revenue and extend tax relief to 10 million more citizens. The move may sound daring, but it overlooks the ground reality: only 1.6 percent of Indians (about 22.4 million people) pay income taxes.

How can these measures genuinely benefit the masses when the benefits are so narrowly distributed?

The Narendra Modi administration is banking on reducing the fiscal deficit to 4.4 percent of GDP and boosting capital expenditure to Rs 11.21 lakh crore while projecting an 11 percent jump in gross tax collections to Rs 42.7 lakh crore for FY26.

Sacrificing Rs 1 lakh crore in direct taxes and Rs 2,600 crore in indirect taxes to ease burdens on businesses and individuals might, nevertheless, be a dangerous trade-off.

Where is that ultra-rich tax that would have allowed those profiteering and earning in higher wealth and income to be taxed proportionally, to manage the revenue shortfall from change in low-income tax rates?

With economic growth projected to decelerate due to weak urban consumption demand and high food inflation, the feasibility of these measures and the government’s own projected targets deserves critical scrutiny, casting doubt on the soundness of the government's fiscal calculations.

Tax Buoyancy over the Years

Examining tax buoyancy reveals significant fluctuations over the years, offering valuable insights into the government's tax revenue efficiency in relation to GDP growth.

Tax buoyancy, which measures the ratio of changes in gross tax revenue to changes in GDP, shows considerable variation from FY15 to FY26 (BE).

This variability highlights the challenges of maintaining consistent fiscal policies and points to the government's inability to implement effective economic strategies that ensure stable and efficient tax revenue collection, raising questions about the reliability of the government's fiscal projections and its capacity to meet ambitious targets without further increasing the economic strain on the middle class and businesses.

Tax buoyancy over the years.

(Source: Budget Documents)

Where are the Jobs?

Additionally, what about jobs? The real solution to weak consumption has always been employment creation, but the government continues to refuse or remotely acknowledge this.

Manufacturing remains stagnant at 15.8 percent of the GDP, despite a decade of the 'Make in India' campaign. Wages have been declining instead of rising, and self-employment has surged. The latter should not be taken as a sign of entrepreneurship, but as a desperate survival mechanism.

This Union Budget, yet again, offers nothing to boost private investment or create high-quality jobs.

The skill-deficit gap in India’s workforce is glaring. As the Economic Survey data highlights, more than 90 percent of the workforce has less than secondary level education and more than 88 percent work in low skill-work sectors.

Instead of addressing the core problem of creating/incentivising ‘good’ jobs, the government has offered temporary tax cuts to generate a feel-good sentiment ahead of state elections.

The Engine of India’s Growth Story: Why It’s Stalling

For an economy to thrive, people need to spend, businesses need to invest, and the government needs to step in where necessary.

Right now, none of that is happening the way it should. Households are stretched thin, companies are playing it safe, and the government’s spending while big on paper, isn’t delivering where it matters most.

A family getting a small tax break should, in theory, have more to spend. In reality, that extra money is already spoken for, devoured by rising grocery bills, school fees, and loan repayments. Instead of shopping for new appliances or planning vacations, people are using their “relief” to keep their heads above water.

Even a middle-class household with dual incomes finds itself cutting back and while switching to cheaper brands, delaying non-essential purchases, and avoiding big-ticket expenses have been a growing trend because of which even businesses aren’t expanding.

Investment in new factories, machinery, or hiring should be the backbone of economic growth, but right now, companies aren’t taking the risk. When examining the numbers, we find that the net foreign investment has nearly vanished, dropping from $8.5 billion last year to just $0.48 billion.

Local businesses are no different; why expand when demand is sluggish and borrowing costs are high? Despite the government's efforts to stimulate private investment through tax reforms and infrastructure initiatives, the private sector remains cautious.

In the fiscal year 2024-25, Gross Fixed Capital Formation (GFCF), a key indicator of investment activity, accounted for 34.7 percent of India's nominal GDP, a modest increase from 32.8 percent in the previous quarter.

This uptick has not, however, translated into a significant surge in private sector investment.

Factors such as subdued domestic demand and global economic uncertainties continue to dampen business confidence.

The Budget's allocation of Rs 1.5 lakh crore in interest-free loans to states for capital expenditure and a Rs 10 lakh crore asset monetisation plan are steps in the right direction, but their impact on private investment remains to be seen.

Instead of creating stable, well-paying jobs, companies are hesitant to hire, knowing that consumers don’t have the extra income to drive demand.

With businesses hesitant and families cutting back, the government is trying to take the lead by pumping Rs 11.2 lakh crore into roads, railways, and digital infrastructure. These are important, long-term investments, but they don’t immediately solve today’s crisis.

Debt is the elephant in the room. With national debt soaring to 83 percent of GDP, interest payments are eating into government revenues. This limits how much can actually be spent on direct relief measures, job creation, or targeted support for struggling industries.

Analysing the various components of the Budget as a share of GDP, we observe a noticeable shift in the government's spending priorities over recent years, which raises significant concerns. Capital Expenditure has shown a steady rise, reflecting the government's focus on infrastructure development.

Various components of the Budget as a share of the GDP.

(Source: RBI, Budget Documents)

However, this comes at the cost of declining Revenue Expenditure post-pandemic, signaling a reduction in essential public services and social support. Meanwhile, Interest Payments continue to hover around 3-3.6 percent of GDP, highlighting the increasing burden of national debt on the budget.

This imbalance not only questions the sustainability of the current fiscal strategy but also underscores the need for more comprehensive economic reforms to address the underlying structural issues.

The Bottom Line?

Without stronger wages, lower inflation, and real confidence in the economy, neither households nor businesses will start spending.

No amount of Budget promises or superficial tax cuts can substitute for genuine economic reform. The government's approach, which seems to prioritise short-term political gains over substantial economic strategy, risks plunging the country deeper into financial distress.

It’s time for the government to confront the reality of the situation and take bold, decisive actions that go beyond mere optics. Only then can we hope to see a truly resilient and thriving economy.

(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. Ankur Singh is a Research Assistants with Centre for New Economics Studies (CNES) and members of the InfoSphere team. Aditi Desai is a Senior Research Analyst with Centre for New Economics Studies (CNES). Ankur Singh is a Research Assistant with CNES and member of its InfoSphere Team. This is an opinion article, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)