In view of the hype and the hoopla associated with the annual Union budget in India, the budget announcements of the finance minister, Nirmala Sitharaman, may perhaps be seen at three distinct but interrelated levels. First, in terms of macro arithmetic, the budget is a statement of government budget constraint whereby the government’s aggregate expenditure (comprising revenue and capital expenditures) must be financed by its aggregate receipts (comprising tax revenue and non-tax revenue), with the shortfall being bridged by government borrowing. Second, the budget can be viewed in terms of various economic and related policy announcements with an eye on future growth and employment potential as well as equity considerations. Third, the budget can also be seen as a balancing act catering to the different constituents of the economy and the polity often represented by the sectoral allocation to different ministries or announcements of various government schemes. This year’s budget seems to have addressed all these three considerations to some degree of affirmation.

In terms of the aggregate budget constraint, as per the current budget for 2025-26, the Union government spends around 14.2% of gross domestic product and earns a revenue of around 9.6% of GDP, leaving a fiscal deficit of 4.4% (with other receipts and recovery of loans, each financing 0.1% of GDP). This is in sync with the declining trends of fiscal deficit and the spirit of the glide path mentioned in the Fiscal Responsibility and Budget Management statement. The increase in capital expenditure in the current budget has also been in tune with the recent years’ budgets. There has been some perceived lack of clarity on the possible buoyancy of capital expenditure and its meagre increase, particularly in view of the tax relief. In her interview following the budget announcement, the finance minister, has, however, dispelled all such misgivings.

If one interpolates the projected fiscal deficit ratio of 4.4% of GDP in 2025-26, one arrives at an estimated growth rate of nominal GDP (inclusive of inflation) of 9%. Given that the real GDP growth during 2025-26 has been projected to be in a range of 6.3%-6.8%, the consequent implicit inflation number turns out to be in the range of 2.2%-2.7%. Do these appear to be too low? If the actual inflation outcome turns out to be somewhat higher, the revised estimate of nominal GDP in 2025-26 could turn out to be higher as well. Thus, the macro managers could have ample headroom for a slightly higher fiscal deficit in absolute terms.

The Union budget is full of various announcements catering to different sectors of the economy. The list of sectors that have been flagged in the budget is quite exhaustive and includes emphasis on agricultural and rural economy; inclusive growth path; manufacturing and furthering ‘Make in India’; supporting micro, small and medium enterprises; enabling employment-led development; investing in human resources; securing energy supplies; promoting exports; and nurturing innovation. From the rhetoric to the specifics, how does the budget perform?

Perhaps encouraged by the growth of the rural economy in 2024-25, the budget proposed a ‘Prime Minister Dhan-Dhaanya Krishi Yojana’ in partnership with states, aspiring to cover 100 districts with low productivity, moderate crop intensity and below-average credit parameters, covering 1.7 crore farmers. There are specific programmes for pulses and vegetables as well. An interesting proposal is to transform India Post into a large public logistics organisation. For the MSMEs, there will be an increased credit guarantee cover. On the manufacturing front, sectors like footwear, toy, or leather production have been focussed on specifically.

The finance minister made a number of announcements relating to investment in human capital and mentioned schemes for anganwadi-covered people; skill formation; providing broadband connectivity to government secondary schools; providing digital-form Indian language books for school and higher education; and expansion of capacity in IITs and in medical education. Focussed attention has also been given to sectors like infrastructure, asset monetisation plan, mining, and tourism. In terms of digitisation, the proposal for a digital public infrastructure, "BharatTradeNet", for international trade and support for integration with global supply chains could be very useful.

Insofar the financial sector is concerned, the following three measures deserve special mention: (a) increase of the FDI limit for the insurance sector from 74% to 100%; (b) expanding the services of India Post Payments Bank; and (c) credit enhancement facility by the National Bank for Financing Infrastructure and Development.

In terms of intentions, the budget has a few proposals on regulation. A High-Level Committee for Regulatory Reforms is proposed to be set up for a review of all non-financial sector regulations. For financial sector regulations, the budget mentions that under the Financial Stability and Development Council (a forum with the finance ministry and all the financial sector regulators like the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority), a mechanism is proposed to be set up to evaluate the impact of the current financial regulations.

As a part of a comprehensive review of customs rate structure announced in the July 2024 budget, the budget proposed to remove seven tariff rates. Besides, there are some proposals relating to relief on import of drugs/medicines, textiles, shipping, and telecommunication as well.

The most interesting proposal in the budget that has attracted attention relates to personal income tax. The budget announced that there will be no income tax payable up to an income of Rs 12 lakh under the new regime. With a standard deduction of Rs 75,000 thus, the effective limit would be Rs 12.75 lakh for salaried tax payers. Such relief in income taxes for the middle class could rekindle consumption-led growth. However, as a result of these proposals, there will be a revenue loss of about Rs 1 lakh crore in direct taxes and Rs 2,600 crore in indirect taxes. How does the finance minister intend to balance the loss of revenue? While the related fine prints need to be read carefully, the budget perhaps expects to make up for the loss of revenue via increased growth-related income tax buoyancy.

How should one read the budget? Admittedly, the budget proposals look quite detailed and cater to many sectors. The finance minister seems to have done a fine balancing act. Nevertheless, going forward, three questions could come up. First, are there too many proposals with some allocation to each purpose and could the devil lie in the details? Second, how does the fiscal arithmetic add up and how realistic are the underlying assumptions? Third, is the philosophy of macro managers moving away slightly from a capex-led growth path to a more consumption-led growth path? Be that as it may, the finance minister seems to have ticked all the right boxes with the wish lists of a diverse group of people.

Partha Ray is Director, National Institute of Bank Management, Pune. Views are personal