Budget strives to meet challenges facing economy

Finance Minister Nirmala Sitharaman presented the Union Budget for 2025-26 with the objective of balancing the demand and supply side measures.

The Indian economy has been facing the headwinds of declining growth, falling value of the rupee, stagnation of domestic demand, insipid private investment, volatility in stock market and youth unemployment on the domestic front. On the international front, the global gloomy economic scenario, along with uncertainties created by the US President, poses a real constraint on India's prosperity.

In this context, the Budget strives to fire four domestic engines of growth fuelled by a slew of reform proposals to overcome the challenges.

The agriculture sector, in the Budget speech, was priority number one. It reflects that both agriculture and the overall economy are facing challenges. Various proposals show that food security is the main consideration. The choice of 100 districts with low agricultural productivity, moderate crop intensity and below-average credit indicators to boost agricultural production, without emphasis on the rise of farmers’ income, raises questions of food security.

On the expenditure side, two heads — Agriculture and Farmers Welfare and Agriculture Research and Education — show a net decline in expenditure of Rs 3,905 crore.

Contract farming of three pulses (tur, urad and masoor) and their procurement to overcome the shortage of pulses is offered to the farmers who register themselves with NAFED and the NCCF.

Instead of reducing the debt burden on farm households, ther credit limit on Kisan Credit Cards has been enhanced from Rs 3 lakh to Rs 5 lakh.

Under the National Mission on High-Yielding Seeds, a special mission for cotton productivity is to be established. This will promote extra-long staple cotton varieties and give an impetus to the textile industry.

The agricultural research and extension system, which is in shambles, has not found a space in the Budget.

The contribution of the manufacturing sector in terms of both the GDP (17 per cent) and employment (13.8 per cent) is quite low. It is a slow-growing sector and limits the overall growth of the economy.

The Budget has chosen MSMEs as the second engine of growth to address this challenge. The demonetisation and Covid-19 shocks had hit the MSMEs badly. Apart from changing the definition of MSMEs, measures such as a customised credit card with a Rs 5-lakh limit for micro-enterprises, funds for startups with a fresh contribution of Rs 10,000 crore and enhancement of productivity, quality and competitiveness can help better their performance. But the headwinds of low productivity and low-wages can limit the expected impact.

The third proposed engine is investment in people and economy. Infrastructure support, in terms of interest-free loans to state governments of the order of Rs 1.5 lakh crore, along with an additional borrowing of 0.5 per cent of the GSDP, with a rider to enact reforms in the power sector, is envisaged.

A controversial reform in the Atomic Energy Act and the Civil Liability for Nuclear Damage Act will be amended to suit western powers and private companies.

India is a relatively low investor in research and development and largely dependent on the doing, using and interacting (DUI) mode of innovation. To boost scientific knowledge, investment in innovation is overdue. The allocation of Rs 20,000 crore as an incentive to the private sector for R&D has been announced.

The Indian economy is chronically deficit in the balance of trade. The imports are growing faster than exports, putting pressure on foreign exchange.

The fourth engine of growth is fuelled with incentives relating to access to export credit, cross-border factoring support, non-tariff support to MSMEs, entry into global supply chains and upgrading infrastructure and skills for attaining the objective of earning higher foreign exchange.

Without addressing the structural problems of the fuelling innovations, it is difficult to contain pressure on the foreign exchange.

Finally, reforms have been made to revive the momentum of economic growth and generate confidence in the business community.

Tax and financial sector reforms are the notable ones. They include an increase in the FDI from 74 to 100 per cent in the insurance sector, rationalisation of procedures for mergers and bilateral investment treaties to give a big push to foreign investment in India. Ease-of-doing-business is the main plank of this Budget.

Several measures to cut customs duty on various imports, especially related to the pharmaceutical sector, are articulated to dampen the direct threat of the imposition of high tariffs on Indian exports. The reduction of customs duties will increase imports, including from the USA, but impinge on the weakening of the rupee and put a strain on the balance of trade.

Direct and indirect tax rates have burdened the middle class and reduced their capacity to demand goods and services. Investors are shying away in India because of lack of sufficient demand. The cut in direct tax rates for the salaried section of the middle class was long overdue. However, this measure, if not supplemented with an increase in job opportunities for the educated youth, will not provide the adequate level of demand stimulus because the larger investment of the middle class is in educating their wards for both upward mobility and high consumption of consumer durables.

Mentioning Bihar, where elections are due, and ignoring other states like Punjab shows an abdication of the principle of justice, inclusivity and equality.

The Budget measures are counter-intuitive to the motto of ‘Sabka Vikas’ as well as the balanced development of India.