Executive Summary
After several Budgets focused primarily on infrastructure capex, the Union Budget for FY25 broadened its scope. It aims to boost employment in manufacturing and services sectors, enhance rural consumption, improve MSME financial penetration, and promote the new direct tax regime. The Budget also addresses financial stability by revising the capital gains regime. Supported by strong tax revenues from robust economic growth, the Budget does not compromise on fiscal consolidation. The fiscal deficit target for FY25 stands reduced to 4.9% of GDP (down from 5.1% in the Interim Budget), with net borrowings slightly decreased. The government's intent is to put India on a smooth, stable, and equitable path towards becoming a developed nation by 2047.
Burgeoning receipts buoyed by momentous economic growth as bumper dividends provide a kicker
Tax buoyancy, driven by an expanding tax base, formalisation of the economy, improved compliance, and strong economic growth, is expected to increase gross tax revenue by 10% [FY25BE vs. FY24P], primarily owing to higher income tax collections. Estimates for corporation tax and GST have been marginally reduced for FY25BE vs. Interim. Additionally, a fuel excise duty cut in Mar'24 has kept growth in this component minimal along with customs duty due to rationalisation. Overall, net tax revenue is budgeted slightly lower than in the interim budget, growing slower on-year compared to gross tax revenue, owing to higher transfer to States. We see limited upside to these revenue estimates.
Non-tax revenues estimates have been taken sharply upwards to Rs. 5.45 trn in FY25BE vs. Rs. 4.0 trn in FY25BE (Interim), buttressed on dividends and profits nearly doubling to Rs. 2.9 trn in FY25BE vs. Interim. This meant that total receipts (ex. debt) are set to see an increase to Rs. 31.3 trn
Expenditures rationalized to broad-base growth and create skilled human capital base, even as capex concentration continues
Total expenditure for FY25BE is projected at Rs. 48.2 trn, an 8.5% y/y increase. Capital expenditure remains unchanged from the interim budget at Rs. 11.1 trn, significantly higher than Rs. 9.48 trn in FY24P, while revenue expenditure is increased to Rs. 37.1 trn. The growth in capex continues to outpace that in revenue expenditure, reflecting a strategic re-allocation aimed at maintaining high-quality expenditure. Notably, within capex, Ministry-wise allocations for Roads, Railways, Defence, and Communications remain unchanged from the Interim Budget.
Within revenue expenditure, the focus remains on building long-term assets. Higher allocation to PMAY-U and significant increase of total transfer to States shows resource allocation priority. Expenditure on agriculture and allied activities is increased to Rs. 1.5 trn, up 3.4% from FY24BE (Interim), with an emphasis on using technology in the sector. Notably, the government has decreased subsidies allocation, and no additional funds were allocated for PM-KISAN. The allocation for MGNREGA remains unchanged but could see an increase based on trends observed in YTDFY25.
Spending on education is projected to increase by approximately 15% [FY25BE vs. FY24RE], emphasizing skill-building for employment-generating sectors. Measures were announced to ease credit flow to MSMEs, especially during times of stress. Additionally, monetary incentives for first-time employees in low-paying jobs and their employers were introduced. The fair allocation for healthcare remains largely unchanged, highlighting the commitment to creating durable human capital to drive growth.
Equitable development goal and strategic self-reliance ushers in greater attention to select regions
Several initiatives were announced under the Purvodaya scheme for the East. Bihar received multiple benefits, including road projects worth Rs. 260 bn, a 2,400 MW power plant costing Rs. 214 bn, and new airports, medical colleges, and sports infrastructure. Andhra Pradesh will receive Rs. 150 bn through MLIs in FY25 for capital development, completion of industrial corridors, and the Polavaram Irrigation Project. Additionally, offshore mineral mining will be promoted with the launch of auctions for these blocks along with setting up Critical Mineral Mission.
Revised indirect taxation regime could have implications for the external sector
Customs duties on precious metals like gold and silver have been reduced to 6%. Additionally, the BCD on mobiles, certain electronics inputs, and some base metals has been cut. The list of duty-exempt capital goods for solar cell and module manufacturing will be expanded, and customs duties on 25 critical minerals have been fully removed. While the impact on domestic value addition would vary in different sectors, these changes could increase imports and widen the trade deficit.
Major rejig in tax regime in the interest of simplification and revenue mobilisation
LTCG on financial and non-financial assets will now be taxed at 12.5% (up from 10%), including listed equity shares, equity-oriented funds, and business trusts. LTCG on property sales and gold is reduced from 20% to 12.5%, but the indexation benefit is removed. STCG on certain financial assets are increased from 15% to 20%. Income from share buybacks will be taxed as dividends for investors. The securities transaction tax (STT) on options sales is increased to 0.1% (from 0.0625%) and on futures to 0.02% (from 0.0125%). These measures aim to rationalise and simply the taxation besides higher revenue mobilisation on back of buoyant capital markets.
On direct taxes, the new tax regime for personal taxpayers is further incentivized by increasing the standard deduction and adjusting tax slabs. The angel tax is abolished along with lower LTCG on unlisted shares, benefiting startups and private market activity. Corporate tax rates for foreign companies are reduced, and the equalization levy on e-commerce firms is removed.
Roadmap of fiscal consolidation is set in stone ensuring bond markets rejoice
The government has reduced its fiscal deficit target for FY25BE to 4.9% of GDP, aligning with the goal of reaching 4.5% by FY26. As a result, gross Union borrowing is cut by Rs. 120 bn [vs. Interim] to Rs. 14.01 trn. Net borrowing for FY25BE is set at Rs. 11.63 trn [Interim: Rs. 11.75 trn], representing a slight decline. The budget effectively balances higher revenue distribution between increased expenditure and deficit reduction. Consequently, we expect 10-year yields to remain range-bound in the near term.
Overall, the Budget maintains high-quality expenditure while rationalizing and reallocating funds to prioritize capacity creation in physical and human assets, employment generation, and equitable growth. Leveraging buoyant revenue receipts and strong capital markets, the government simplified and rationalized the tax structure to enhance financial stability. This approach enabled a further reduction in the fiscal deficit target for FY25BE to 4.9%, ensuring India remains on a clear path to fiscal consolidation. |
