Well-crafted Union Budget to pump prime growth

Continuing its focus on fiscal consolidation by pegging fiscal deficit at 4.8 percent of GDP in FY25 and intending to bring it down to 4.4 percent of GDP during FY26 reflects a knack for allocational efficiency despite stressful times. The Union Budget – 2025-26 (UB26) has brought together a set of measures to boost consumption with major relief to income taxpayers. 

However, out of 7.4 crore tax returns filed in 2022-23, 70 percent of them have no tax liability. Just 2.24 crore people paid income tax working out to just 1.6 percent of the total population. In 2020-21, the middle-class base accounted for roughly 31 percent of the population – about 43.2 crore people or over 94,000 households. If the middle class is to create demand for consumption, more units of enterprises have to come up opening many employment opportunities.   

Unless the taxpayer base increases, it may not be able to spur consumption. While focusing on 6 sectors – taxation, power, urban development, mining, financial sector, and regulatory framework, UB26 identified four critical growth engines – agriculture, MSME, nvestments, and Exports to stimulate growth. Ease of doing business, Impetus on infrastructure capex, social sector development, fiscal prudence, and balanced funding mix are the other aspects of policy focus.

UB26 data 

The total receipts during the next fiscal year—direct/indirect taxes and others—amount to Rs 35 lakh crores, and expenditures for the year are Rs 50.7 lakh crores, leaving a deficit of Rs 15.7 lakh crores, which makes up 4.4 percent of GDP. Out of the revenue receipts – personal income tax is 33.7 percent, corporate tax – is 25.6 percent GST is 27.6 percent, and Revenue receipts are budgeted to grow 11.1 percent. The gross receipts of UB26 are estimated at Rs 35 lakh crore in FY26, translating into a five-year CAGR of 15.6 percent. Non-tax revenues are concerned, two-thirds of this increase is expected to come from dividends and profits from RBI/PSUs—budgeted to grow 12.3 percent to a record high of Rs 3.25 lakh crore. The previous year, RBI remitted a dividend of Rs 2.1 trillion and the current year data is yet to unfold. The government aims to collect Rs 47000 crores from the disinvestment which usually lags. As against the estimate of Rs 33000 crores of disinvestment, the shortfall is expected to be 34 percent As a result of the deficit, the market borrowings during the year are pegged at Rs 14.8 lakh crores. India’s internal debt levels are lower than many advanced economies. 

The center’s debt-to-GDP ratio is estimated at 56.1 percent in FY26 on the way to reaching the FRMB target of 50 percent +/- 1 percent by 2030. India stands better in debt to GDP ratio compared to the USA at 112.3 percent, Japan at 205.6 percent, the UK – at 100.5 percent France at 92.3 percent, and Brazil at 81.2 percent. 

Capex continues to remain a key focus with the revised allocation of FY25 to Rs.10.1 trillion. FY26 it is slated to grow at 10.1 percent YoY raising the outlay to Rs 11.2 lakh crore, translating into an annualized growth of 20.3% since the pre-pandemic period. Capex allocations continued to be sustained at 3.1 percent of GDP as of FY25. Primary focus areas include roads, railways, defence, telecommunications, and housing & urban affairs, accounting for 72% of the total FY26BE capex. Roads received the highest allocation of Rs. 2.7 lakh crores. The revenue expenditure works out to Rs. 39.4 crores containing the increase to 6.7 percent in FY26. Subsidy expenditure is largely stable in absolute terms at Rs.4.26 lakh crores. However, the share of subsidies in overall expenditure has been on a steady decline since the pandemic, reaching a 25-year low of 8.4 percent in FY26. The fiscal prudence measures are working steadily. 

A glimpse of social spending will be interesting. MGNREGS – 86000 crores, Pradhan Mantri Awas Yojana – Rs.78100 crores, Rural infrastructure – Pradhan Mantri Gram Sadak Yojana – Rs. 19000 crores, National Education Mission (NEM) – 41300 crores, Swachh Bharat mission – Rs. 12200 crores and Pradhan Mantri Krishi Sinchayi Yojana = Rs. 3300 crores. 

Income tax changes

Providing more funds in the hands of income taxpayers, some tax concessions have been proposed in the new scheme. Individual income up to Rs12 lakhs is exempted from income tax, up from Rs. 7 lakhs. The standard deduction is Rs 75,000. Effectively up to Rs. 12.75 lakhs, there will be no income tax obligations. Tax exemption on interest on deposits is raised from Rs 50,000 to Rs 1,00,000. Under the revised concessions announced in UB26, taxpayers with income of Rs 12 lakh will save Rs 80,000, those having income of Rs 18 lakh will save Rs 70,000, and taxpayers with income of Rs 24 lakh will save Rs 1.1 lakh. 

Bringing further relief to those educating their dependents abroad, the threshold to collect tax at source (TCS) on remittances under RBI’s Liberalized Remittance Scheme (LRS) is proposed to be increased from Rs 7 lakh to Rs 10 lakh. There will be no  TCS on remittances for education purposes, where such remittance is out of a loan taken from a specified financial institution. 36 life-saving drugs will be exempted from basic customs duty to make them cheaper. 

Opportunities for banks 

Savings on income tax can flow into bank deposits if banks can work on it. The exemption of interest on deposits should help attract deposits of senior citizens. Raising the threshold of tax at the source can help banks strengthen deposit relationships with those remitting funds abroad under RBI’s liberalized Remittance Scheme (LRS). KCC limit raised from Rs 3 lakhs to Rs 5 lakhs, a new credit card to be introduced for MSME units up to Rs 5 lakhs, enhanced credit guarantee for loans to MSME. Services of India Post Payment Bank to be expanded to enhance financial inclusion in rural areas. UB26 is thus providing opportunities for banks to focus on increasing business both on the assets and liability side.  

The multiplier impact of the well-articulated measures while maintaining fiscal prudence should be able to spur consumption, revive investments and domestic savings, step up employment opportunities through the enhanced manufacturing and farm sector activities. These outcomes should be able to pump prime the economy to move towards the 7 percent GDP mark breaching the estimates made in the economic survey where it was pegged between 6.3 to 6.8 percent.