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Budget leaves deregulation reforms on the back-burner

The Budget has left the task of deepening economic reforms unfinished in the critical areas of deregulation and ease-of-doing business.
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Doles for Bihar: All budgets are political documents and this one is no different. ANI
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The need to push urban consumption as well as to satisfy a large voter constituency seems to have been a major driver behind the 2025-26 Budget proposals. The unprecedented tax exemptions for incomes up to Rs 12 lakh annually comes as a bonanza for a middle class that had been carping for years over the excessive revenue burden on its shoulders. Yet, the government has managed to continue striding towards fiscal consolidation by bringing the fiscal deficit target down to 4.4 per cent from the 4.8 per cent achieved in FY 2025.

The other areas of revenue inflow are slated to be a much larger asset monetisation programme while the public sector disinvestment target is also ambitious despite having failed to meet goals set in the past few years.

Finance Minister Nirmala Sitharaman's eighth set of budget proposals has much more than just the big bang income tax relief, though it tends to overshadow the other elements. The leap to the Rs 12-lakh income level is bound to be controversial, given the arguments that taxes should be levied at levels close to a country's per capita income. Yet, with personal income tax confined to a small proportion of the population — roughly two per cent — it is unreasonable to expect this segment to bear such a large burden.

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Though indirect levies are borne by all citizens, direct tax collections are derived either from corporates or individuals, largely in the middle class category. In fact, personal income tax inflows are lately reported to be exceeding corporate tax revenues. So, this year's relief is an overdue concession.

The presumption is this will revive urban consumption, which has been sluggish in the past year. The Economic Survey touched on the issue and called upon corporates to raise wages and compensation to boost demand. Tellingly, it commented on the fact that the industries are "swimming in profits" while salaries are not rising commensurately.

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In fact, increasingly, it seems private industry is putting all the onus on the state for economic development. For instance, industry associations had earlier called for higher public spending of up to 25 per cent in FY 2026. It stands to reason, however, that public capital expenditure cannot be increased ad infinitum. The Budget proposals envisage a 10 per cent rise in capex over the revised estimates of FY2025. This follows several years of double-digit increases in public spending.

The state is rightly signaling that it is time for the private sector to play its due role in economic revival. Economic policymakers have spoken of the compact between government, private industry and workers that led to Japan's economic resurgence after the World War II. A similar compact may be difficult to evolve here, but there is no harm in giving it a shot.

Any industry-state cooperation can be facilitated by improving the ease-of-doing business. This Budget has unveiled several measures to unclog the regulatory cholesterol in the system. There is a flaw, however, in the very first step of setting up a high-level committee for non-financial regulations. It has been given the prolonged deadline of one year. A group of determined experts can surely finalise recommendations within three to four months.

Other measures are welcome, like the setting up of a mechanism under the Financial Stability and Development Council to formulate a framework to improve responsiveness.

The proposal for an Investment Friendliness Index for States, however, could be a competitive scorecard, but is not much of an incentive for reforms. The process of decriminalising laws is also being carried forward but a more rapid pace of change is needed.

As for specific schemes outlined in the proposals, there are three noteworthy ones. The first is the Prime Minister Dhan-Dhaanya Krishi Yojana. It appears to be a well-designed model to help farmers in low productivity areas by easing credit and improving irrigation facilities, that can be gradually expanded to support more farmers. The second is the plan to augment tourism facilities at 50 locations in partnership with states. This sector has enormous potential for job creation and the proposals for skill development and provision of credit facilities are laudable.

The third segment which is vital for this country is in the area of high technology. This includes a plan for a Centre of Excellence in Artificial Intelligence for education as well as a new Fund of Funds for start-ups, which is being given an allocation of Rs 10,000 crore. It must be recalled that the earlier government contribution of the same amount for the Fund of Funds led to commitments of as much as Rs 91,000 crore in the Alternate Investment Funds.

All budgets are political documents and this one is no different. The largesse to the middle class comes days before the Delhi elections, an arena where the segment plays a big role. Several schemes announced for Bihar as well was unmistakable. They include the creation of a makhana board, new airports and irrigation projects.

The Budget has lost an opportunity, however, to make greater changes in the area of deregulation. The reforms in customs duty slabs are welcome as well as the cuts on levies on electronic component imports, especially for mobile phones and electric vehicles. But it is here that much greater overhauling is needed to reduce the effective duty rates.

Simply put, tariff walls remain too high at a time when the external environment is dictating the need for greater opening up. Industry needs to plug into global supply chains while export growth is being threatened by the prospect of reciprocal levies by the US under an aggressive Donald Trump. The proposed income tax bill should come as a breath of fresh air, but a matching reworking of the customs duty framework is also needed.

Finance Minister Nirmala Sitharaman's eighth Budget may bring good cheer to the middle class, but it has left the task of deepening economic reforms unfinished in the critical areas of deregulation and ease-of-doing business.

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