The Union Budget 2025-26 attempts to tackle key issues hampering India’s economic momentum—weak domestic demand, sluggish private investment, and slow wage growth—all contributing to tepid GDP growth. However, the approach seems cautious, lacking concrete assurances that the measures will resolve these underlying challenges. A major feature of the Budget is the introduction of substantial tax breaks aimed at boosting consumption. While this move puts more money in the hands of the middle class, potentially stimulating demand, it also restricts the government’s ability to expand public spending on capital expenditure, an alternative growth lever.
The Budget prioritizes fiscal consolidation, targeting a fiscal deficit of 4.4% of GDP in FY26, down from 4.8% in FY25. Despite offering tax rebates, the government projects higher direct tax receipts, banking on better compliance through increased use of technology—a strategy that has already shown results, with direct tax revenue surpassing budget estimates in FY25. However, whether these tax incentives alone can stimulate significant demand remains uncertain. Private investment has stagnated despite corporate tax cuts and increased profitability.
The Budget continues offering corporate incentives, but a shift towards phasing out such tax breaks might have been more effective. Capital expenditure remains high, but allocations for road transport, telecom, and Railways have either decreased or stagnated, raising questions given the infrastructural needs in these sectors. On the positive side, MSMEs and startups receive enhanced credit support, and clean energy sectors benefit from duty exemptions. Employment remains a pressing concern. The Budget introduces social security measures for gig workers and emphasizes skilling initiatives. However, the absence of any mention of the Employment Linked Incentive scheme, launched ambitiously last year, raises concerns. In summary, while the Budget addresses critical economic issues, it leans heavily on optimistic assumptions and leaves room for skepticism regarding its practical impact.
