Why Union Budget 2025 is India's 'Tipping Point' Budget

Budget 2025 is key to India staying on track for achieving the economic goals of Viksit Bharat by 2047.

A file photo of Finance Minister Nirmala Sitharaman ahead of Budget 2024-25. 

(Photo: PTI)

How is ‘Tipping Point’ – a phrase heard most often in the context of climate change – relevant for Union Budget 2025? It becomes relevant in the context of India’s long-term goal of becoming a developed economy (Viksit Bharat) by 2047.

If India fails to achieve the required growth during the intervening 22 years, an ageing and slowing population growth will rob it of growth potential.

The required growth rate is 9 percent per year in current dollar terms. The average over 2001 to 2023 – the highest-ever of 8.3 percent per year – isn’t good enough.

Beware of the Upper Middle-Income Trap

We are still a lower middle-income economy and have to make two transitions – the first to upper middle-income status, and then to high income. China is at the cusp of qualifying for high-income status but slowing growth is pushing the transition even further out.

Could India suffer the same fate as China, or worse? The good news is the Indian population is expected to keep growing till the late 2060s.

Also, India is not prone to wild swings in government policy, unlike China or more recently, the US, which is a virtue. We need enhanced dynamism to increase the efficiency of capital allocation and project execution, both of which feed into high growth.

At present, 20 percent of project completion cost is wasted due to time and cost overruns.

The Narendra Modi government has leveraged its considerable achievements – political dominance with an increasing vote share since 2014 in the Union government, to extend its “double engine” model of vertical party alignment, to 16 states and Union Territories (out of 31), accounting for 54 percent of the national GDP (2021-22).

As in China, vertically integrated party control cheers investors and the engineering and construction industry. Navigating the regulatory spaghetti surrounding project development becomes easier, top down, from within the government.

Shun the Hubris of Success

There are only two ways to increase growth – either to increase savings and investment or to increase the productivity of investment, more bang for the buck via disruptive innovation.

A good example of the latter is DeepSeek – a Chinese company that has created an open-source, generative AI large language model (LLM) at a fraction of the cost of legacy LLMs in the US.

Constant churn is the only growth constant. The China model relies on heavy state financing, the same as in India now, since the Public Private Partnership (PPP) option was junked as being too cumbersome to implement. The only problem is we do not have the resources to feed a public-finance-heavy development model.

Growth picked up in India in the 1980s, and post 1991-92, once state controls were liberalised and corporates encouraged to become globally competitive through trade.

The high growth period of 2006-13 was accompanied by high investment at 34 percent of GDP (8 percent government and 26 percent private). In the succeeding 10 years to 2023, the total investment declined by 14 percent to 29 percent of GDP (7 percent government and 22 percent private).

With lower investment, growth has languished because the efficiency of capital use has remained static. Public investment must now be used to “pull in” private investment and suitable metrics designed to validate the efficiency outcomes.

Fiscal Sustainability Attracts Global Investments

Our public debt is 82 percent versus the norm of 60 percent of GDP. Our fiscal deficit (FD) was mostly below the outside limit of 4 percent of GDP during Modi's first term (fiscal 2016 to 2019) but continuously outside the norm of 3 percent of GDP since 2000.

High debt and high FD are not unusual post economic shocks like the Western Financial Crisis 2008-10 or the COVID-19 epidemic 2019-2021. At present, FD is 4.9 percent of GDP.

The problem with living beyond ones means is that at times of crisis, there is no “reserve margin” left in public finance resources to deploy counter cyclically to combat the downturn. Frugality and efficiency should be rediscovered.

The limits of taxing the rich to benefit the poor, and enforcing income equality through taxation, has severe limits. Capital is globally mobile, so tax rates need to converge, unless a unique country asset – like Lithium reserves, or in the past, gold or petroleum reserves – provide a TINA (there is no alternative) advantage, users have no option except to take what is given.

Research establishes that natural resource abundance unleashes negative responses in the domestic economy that dull the edge for innovation and good governance. Russia, and now the US, are good examples of falling prey to the fallacy of easy economic wins.

For the US, “drill baby drill” could be the last hurrah. In India, tax (both Union and state government) to GDP ratios have increased steadily from an average of 14 percent during 2000-05 to 16 percent during 2006-13 to 17.7 percent during 2014-23. This tax effort is commendable for an economy in the lower middle-income category.

Should efforts be made to garner more tax? Yes, because anecdotal evidence points to significant evasion.

However, tax rates must conform to competitive principles because they impact even the scrupulous taxpayer and can render them uncompetitive. The flight of the ultra-rich from India is because high tax rates sequester more than one half of the income in income tax alone and high rates of Goods and Services Tax (GST) further decrease the income available for consumption or investment.

Budget 2025 could, usefully, reduce the highest rate for individual income to corporate tax rate levels, which were reduced in 2019. This reduction could be transmitted downwards to all lower tax rates. Whether the surplus income released is invested or consumed, some of it will be returned as tax to the government.

Are We on a Cul-de-sac?

We must find a path out of the triple constraint of:

(a) Heavy commitments to welfare spending to bolster the political stability of the government – a legitimate goal for politicians

(b) Remaining hostage to corporate balance sheets by providing incentives and protection via import tariffs, to neutralise the high domestic cost of logistics, utility services, and regulatory friction

(c) Abandonment of a useful tradition in geopolitics of pluralism in favour of an uneasy alliance with an increasingly erratic and transactional US to counter Chinese excesses – political and mercantilist.

India should, instead, become the option to both the US and Chinese tantrums by deepening trade and economic links with other friendly economies on competitive terms.

Global trade outside the US is likely to grow if the US turns protectionist.

Rapidly growing the domestic economy, targeting welfare better by encouraging state governments to lead in this area, deepening industry-educational links to foster R&D and market-based skills development, application of liberal principles of balance between civil rights and State power, and growing our institutional capacity to integrate all segments of the economy with global networks, are worthwhile high-level initiatives in the coming days.

(Sanjeev S Ahluwalia is a Distinguished Fellow, Chintan Research Foundation (CRF), a former IAS officer and an expert in governance and economic regulation. This is an opinion piece. All views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)