Big Tax Relief Okay, But Modi Govt Needs To Do More For Accelerating GDP Growth

The Finance Minister did not do much on the capex front this time. She proposed Rs11.21 lakh as capital expenditure for the next financial year that begins in April this year. This is just Rs10,000 crore more than Rs11.11 lakh crore earmarked as capital expenditure in the previous budget, representing an upswing of 0.9 per cent. A bigger capex allocation and credible steps to improve the execution capabilities would have given more positive ammunition to the economy as well as stock markets

Wearing a specially-woven Madhubani saree, Finance Minister Nirmala Sitharaman presented her eighth Union Budget on a trot. That’s a record for she has become the first Finance Minister of India to come out with eight consecutive budgets. The record of presenting the highest number of Budgets is still with former Prime Minister Morarji Desai who handled the key government exercise 10 times. But he did not do it consecutively. Senior Congress leader P Chidambaram did nine times with intermittent gaps. Of course, Sitharaman will break all the records and set a new benchmark if she continues in her current role till the next General Elections.

The Finance Minister, known for opting for a new type of saree for the big day every year, cleverly chose Madhubani, a hand-woven artwork of six yards from Bihar. It is said that Dulari Devi, a noted Madhubani artist and recipient of Padma Shri award in 2021, has gifted the saree to Nirmala Sitharaman. Hopefully, this episode spurs demand for Madhubani sarees across the country.

But on her part, the Finance Minister has gifted many things to Bihar in this year’s Budget – the expansion of Patna airport, new Greenfield airports, Makhana Board for foxnut farmers, Rs11,500-crore for Western Kosi Canal, a food tech institute, and finally, a big fillip to Buddhist tourism circuits. Incidentally, Western Kosi Canal project is aimed at improving irrigation facilities in Madhubani and Darbhanga districts in the Mithila region of Bihar. Age-old Madhubani art, also known as Mithila art, derives its name from Madhubani district. Anyway, Sitharaman dished out this bonanza to Bihar keeping an eye on upcoming Assembly polls there, scheduled for October-November this year. The Modi government excelled in pampering poll-bound States in annual budgets in the past-decade or so. It’s no different this time too.

But the biggest positive takeaway from Sitharaman’s eighth Union Budget is the enhancement of the tax-free income limit to Rs12 lakh excluding the standard deduction of Rs75,000, from Rs7 lakh now. That means individuals with personal income up to Rs12.75 lakh will not be required to pay any income tax. That’s a huge, unexpected windfall for the country’s middle class.

The Finance Minister said the government will forgo a whopping amount of Rs1 lakh cr for increasing the tax-free personal income limit. The intent behind this popular move is crystal clear. As the urban consumption has hit a slow lane in the wake of sluggish rise in salaries and persistent inflationary pressures, the Modi government is going to put more cash into the hands of the urban salaried middle class for the next financial year. Is it a sort of direct benefit transfer (DBT)scheme for salaried class? Looks like so. But the Modi government expects the beneficiaries of these tax incentives to splurge the extra cash on goods and services. If that happens, the government will get GST on such purchases. So, a significant portion of Rs1 lakh crore of the tax outgo will come back to the government in the form of indirect taxes.

That means the net outgo from the government because of steep tax cuts will be a lot lower than Rs1 lakh crore if the tax sops spur consumption as intended. Additionally, there will be a fillip to the economy as well because consumption accounts for as much as 60 per cent of our gross domestic product (GDP). There is a political angle to the income tax cut as well. The ever-growing middle class in the country forms the core support base of the ruling Bharatiya Janata Party (BJP). So, the Modi government can’t afford to ignore this key segment of the society while dishing out welfare schemes for others. Perhaps, through this move, BJP is seeking to further consolidate its core support base for future elections including the 2029 General Elections. That way, the tax cuts will be a win-win proposition in multiple ways. Let’s wait and see whether this gamble offers intended dividends – economic, political or otherwise.

But the Finance Minister did not do much on the capex front this time. She proposed Rs11.21 lakh as capital expenditure for the next financial year that begins in April this year. This is just Rs10,000 crore more than Rs11.11 lakh crore earmarked as capital expenditure in the previous budget, representing an upswing of measly 0.9 per cent. Known for its propensity to go for mega allocations for capex, the Modi govt surprised everyone by keeping the allocation flat. It is said that the government will miss the capex target of Rs11.11 lakh crore for the current fiscal by Rs93,000 crore. This might have prompted the Modi government to go slow on the capex front for the next fiscal year. However, a bigger capex allocation and credible steps to improve the execution capabilities would have given more positive ammunition to the economy as well as stock markets.

This apart, the Finance Minister identified agriculture, MSMEs (micro, small and medium enterprises), investments and exports as four growth engines of the country’s economy and made allocations on those lines. The central government is obviously focusing on labour-intensive agriculture and MSMEs for generating more employment opportunities.Besides, the government has also made some friendly gestures to new US President Donald Trump by reducing import duties on high-end motorcycles, cars and giving importance to nuclear power. It’s to be seen how effective these measures will be.

But the bottom line is simple. In the Economic Survey for 2024-25, Chief Economic Advisor V Anantha Nageswaran estimated that India’s economy would grow at 6.4 per cent in FY25. At the same time, he forecast a growth rate of 6.3-6.8 per cent for the next financial year i.e. FY26. In the same report, he said India should clock an average annual GDP growth rate of eight per cent for next 20 years for achieving Viksit Bharat (Developed India) by 2047.

-Interestingly, in her Budget speech, the Finance Minister did not dwell much on the need for enhancing the GDP growth rate, barring a customary reference at the beginning. Does she believe that the measures she has announced in her latest Budget will accelerate growth to beyond eight per cent? It looks like so. But it is very unlikely that her wishful thinking will come true. It is good that the Union Budget for 2025-26 has given a big relief to taxpayers, but the Modi government needs to do much more to acceleratethe GDP growth rate to eight per cent in order to transform India into a developed country. Otherwise, the Viksit Bharat goal will remain mere a slogan even in 2047 when India celebrates its 100th year of Independence. That’s for sure.