Union Budget 2025: Consolidation, Capital Expenditure, and Consumption as the Three Cs

The budget will be unveiled at a time when the economy's two main growth engines, capital expenditures and consumption, are starting to wane. There is growing demand that the budget increase the discretionary income of urban consumers, who are struggling due to slowed income growth and rising inflation. At the same time, private corporate capital expenditures remain cautious, and the capital expenditure cycle continues to rely on government assistance. All of this assistance must be provided by the Union Budget while maintaining fiscal prudence and adhering to the declared budget deficit target of 4.5% of GDP for FY26. Such high expectations coincide with a shift in state governments' fiscal strategies away from capital expenditures and toward targeted income schemes. Can the Center meet the needs of consumption, capital expenditures, and consolidation? Are there any undiscovered areas of financial room, and if so, where? First, is it possible to reduce income tax on consumption, and if so, how effective is it? Income tax buoyancy has significantly increased in recent years, which is indicative of improved stock market returns, formalization, and collection efficiency. Consequently, we project that corporate tax collection will drop to 2.9% of GDP in FY25 while income tax collection will increase to 3.9% of GDP. Given the need to fund capital expenditures and maintain budgetary prudence, there is only minimal room for an income tax cut in FY26. The new income tax system is probably going to offer the tax cut. We have factored in a slowdown in the increase of income tax collections for FY26, maintaining collection as a percentage of GDP at 3.9%. To what extent does the reduction in income taxes increase consumption? Since just 2% of the population, or 2.9% of those in working age, pay taxes, the income tax's reach is restricted. Indirect taxes have a far broader reach and will increase demand more successfully. In FY24, indirect tax revenue—which includes GST, excise taxes, and customs duties—amounted to 6.6% of GDP. It is projected that indirect tax revenue will increase to 6.8% of GDP in FY25. While the GST counsel determines the GST rates, the Union Budget solely controls excise and customs taxes. Another economic engine that is beginning to falter is the capital expenditure cycle, since both federal and state government spending fell in FY25. A change in focus during the elections was the cause of the drop. In FYTD25 (April–November), state government capital expenditures are down 6.1% YoY, while central government capital expenditures have decreased 12.3% YoY. Even after factoring in the Center's increased capital expenditure, overall capital expenditure for the entire year FY25 is probably going to be INR9.6 trillion, which is less than the INR11.1 trillion objective.