Beyond tax cuts, a closer read of the Union Budget

The budget sets a fiscal consolidation target of 4.4% of GDP in FY26. The Fiscal Responsibility and Budget Management (FRBM) Act 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 GDP in FY23 (as noted in the Economic Survey 2024-25), raises concerns about funding long-term public investments crucial for inclusive growth without resorting to excessive market borrowings, which could crowd out private investment.

Despite India's ambition to be a global manufacturing hub, the sector's contribution remains stagnant at around 17% of GDP. While Production Linked Incentive (PLI) schemes have shown limited success, the budget introduces a National Manufacturing Mission and revised MSME 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 GDP. 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.

In agriculture, schemes like the Prime Minister Dhan-Dhaanya Krishi Yojana and the National Mission on High-Yielding Seeds signal a strategic shift from blanket subsidies towards precision agriculture and climate resilience. Enhancing the Kisan Credit Card 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 Bharat Trade Net 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.