Beyond tax cuts, a closer read of the Union Budget
Many of the measures in manufacturing, agriculture, and climate action, lack rounded strategies
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Context
The Union Budget 2025-26, presented against a backdrop of complex macroeconomic challenges, outlines an ambitious path for development under the banner of 'Viksit Bharat'. An analysis of the budget highlights critical trade-offs and structural hurdles in achieving fiscal consolidation, boosting manufacturing, supporting agriculture, managing external sector vulnerabilities, and transitioning to clean energy.
UPSC Perspectives
Economic
The budget sets a fiscal consolidation target of 4.4% of in FY26. The mandates reducing the fiscal deficit to ensure macroeconomic stability. However, the budget relies on optimistic revenue projections (11.2% overall tax growth, 14.4% income tax growth), which may be challenged by slowing consumption and external demand. Achieving this requires improved tax buoyancy (responsiveness of tax revenue to GDP growth). Significant personal income tax cuts under the new regime aim to increase disposable income, but cost the exchequer an estimated ₹1 lakh crore. This revenue sacrifice, combined with a structural decline in household savings to 18.4% of in FY23 (as noted in the ), raises concerns about funding long-term public investments crucial for inclusive growth without resorting to excessive market borrowings, which could crowd out private investment.
Industry and Manufacturing
Despite India's ambition to be a global manufacturing hub, the sector's contribution remains stagnant at around 17% of . While schemes have shown limited success, the budget introduces a and revised classification limits (increasing investment limits 2.5x and doubling turnover thresholds) to achieve economies of scale. However, critical structural bottlenecks persist, such as regulatory inefficiencies and infrastructure gaps. Crucially, the budget lacks concrete measures to boost industrial Research and Development (R&D), currently at a low 0.64% of . This low R&D intensity hampers India's ability to transition from cost-arbitrage-driven manufacturing to innovation-led competitiveness on par with advanced economies.
Agriculture and External Sector
In agriculture, schemes like the and the signal a strategic shift from blanket subsidies towards precision agriculture and climate resilience. Enhancing the loan limit from ₹3 lakh to ₹5 lakh provides financial flexibility. However, reliance on short-term credit fails to address deeper systemic issues like price volatility and market access, potentially trapping farmers in a debt cycle. On the external front, despite steady growth in services exports, the budget’s trade facilitation measures like are insufficient to offset persistent trade deficits. The lack of a comprehensive export diversification strategy leaves India vulnerable to currency depreciation and external shocks, highlighting the need for deeper integration into global value chains.