Economy & BudgetPriority2025-02-01

Presentation of the Union Budget 2025-26

Why focus: GS3 Economy flagship — high Match-the-Following probability for specific fiscal deficit targets (4.4%) and capex outlays.

In News

What Happened

Finance Minister Nirmala Sitharaman presented the Union Budget 2025-26 on February 1, 2025. The budget announced a fiscal deficit target of 4.4 percent of GDP and maintained a high capital expenditure of Rs 11.21 lakh crore. It also launched the PM Dhan-Dhaanya Krishi Yojana to boost agricultural productivity in 100 underperforming districts and provided tax relief to the middle class under the new tax regime.

Why It Matters

This budget is crucial as it successfully achieves the government's post-pandemic fiscal consolidation goal of bringing the deficit below 4.5 percent by 2025-26. It balances fiscal prudence with targeted investments in agriculture, urban infrastructure, and middle-class tax relief to stimulate domestic consumption and ensure long-term macroeconomic stability.

Background

History & Context

The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 was enacted to institutionalize financial discipline, reduce fiscal deficit, and improve macroeconomic management. Following the severe economic shock of the COVID-19 pandemic, India's fiscal deficit peaked at 9.2 percent of GDP in 2020-21. In response, the government announced a revised fiscal glide path in the 2021-22 budget, aiming to steadily reduce the fiscal deficit to below 4.5 percent of GDP by the financial year 2025-26. Previous committees, such as the N.K. Singh Committee on FRBM (2017), had recommended stricter long-term debt and deficit targets, but the pandemic necessitated a more flexible, growth-supportive approach. The 2025-26 budget marks a significant milestone by delivering precisely on this promised post-pandemic consolidation path, achieving a target of 4.4 percent while continuing to sustain essential capital expenditure.

What Changed

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Fiscal Deficit Target: Reduced to 4.4 percent of GDP for 2025-26, down from the revised estimate of 4.8 percent for 2024-25, successfully adhering to the FRBM glide path.
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PM Dhan-Dhaanya Krishi Yojana: A new 6-year initiative was launched with an annual outlay of Rs 24,000 crore, converging 36 central schemes to target 100 underperforming agricultural districts.
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Income Tax Exemption Limit: Under the New Tax Regime, income up to Rs 12 lakh was made completely tax-free, and the standard deduction was raised to Rs 75,000.
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Urban Challenge Fund: A new allocation of Rs 1 lakh crore was announced to implement proposals for 'Cities as Growth Hubs' and creative urban redevelopment projects.
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Mission for Aatmanirbharta in Pulses: A 6-year mission was launched focusing specifically on achieving national self-reliance in the production of Tur, Urad, and Masoor.
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Disinvestment Target: The target for disinvestment receipts was revised downward to Rs 47,000 crore for 2025-26, reflecting a more realistic assessment compared to previous years.
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Loans to States: Rs 1.5 lakh crore was earmarked for 50-year interest-free loans to state governments to encourage state-level capital expenditure and regional development.

What Did NOT Change

Despite expectations of widespread populist measures, the government resisted aggressive welfare spending that could derail its fiscal consolidation strategy. Interest payments remained the largest component of revenue expenditure, accounting for roughly 25 percent of the total expenditure budget. Additionally, the Old Tax Regime saw no structural changes or enhanced deductions, reinforcing the government's systematic policy nudge towards wider adoption of the simplified New Tax Regime.

Prelims Angle

NCERT Connection

This event directly applies concepts from Class 12 Macroeconomics Chapter 5 - 'Government Budget and the Economy'. The chapter explains the critical distinction between Revenue Expenditure and Capital Expenditure, and defines Fiscal Deficit as the total borrowing requirements of the government. The 2025-26 budget illustrates these concepts in action by aggressively reducing the fiscal deficit to 4.4 percent (fiscal consolidation) while ring-fencing capital expenditure at Rs 11.21 lakh crore (3.1 percent of GDP) to ensure that borrowing translates into productive long-term infrastructure rather than just funding day-to-day government operations.

Common Misconceptions

✗ Capital receipts form the bulk of the government's earnings to fund its massive annual expenditure.

✓ Revenue receipts, primarily direct and indirect tax collections (estimated at Rs 28.37 lakh crore for 2025-26), form the overwhelming majority of government earnings.

Because headlines heavily feature 'borrowing' and 'capital expenditure' figures, people mistakenly assume capital receipts are the primary source of government income, whereas borrowings merely plug the deficit gap.

✗ A high fiscal deficit always indicates that the government is wasting money on freebies and populist schemes.

✓ A fiscal deficit can be economically productive if the borrowed funds are channeled into Capital Expenditure that creates long-term physical assets, yielding future returns.

People often equate national deficits with personal household debt, ignoring the macroeconomic multiplier effect that occurs when a government borrows to build highways, railways, and digital infrastructure.

Practice Questions

Q1

How Many Correct

Consider the following statements regarding the Union Budget 2025-26: 1. The fiscal deficit target has been set at 4.4 percent of GDP, successfully meeting the post-pandemic glide path goal of reaching below 4.5 percent by 2025-26. 2. The PM Dhan-Dhaanya Krishi Yojana aims to improve agricultural productivity in 100 underperforming districts by converging 36 central schemes. 3. The capital expenditure outlay has been significantly increased to constitute over 5 percent of the GDP to fund the National Infrastructure Pipeline. How many of the above statements are correct?

Q2

Match the Following

Match the following announcements made in the Union Budget 2025-26 with their corresponding numerical targets or financial allocations: List I (Announcement) A. PM Dhan-Dhaanya Krishi Yojana target districts B. Urban Challenge Fund allocation C. Standard Deduction under New Tax Regime D. Disinvestment target for 2025-26 List II (Target/Allocation) 1. Rs 1 lakh crore 2. 100 districts 3. Rs 47,000 crore 4. Rs 75,000

Q3

Assertion & Reason

Assertion (A): The Union Budget 2025-26 reduced the fiscal deficit target to 4.4 percent of GDP while maintaining capital expenditure at Rs 11.21 lakh crore. Reason (R): The Fiscal Responsibility and Budget Management (FRBM) Act legally mandates the complete elimination of both fiscal and revenue deficits by the financial year 2025-26. Select the correct answer.

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