While the big cut in personal income tax in Budget 2025-26 has been widely welcomed, some concerns have been raised about a supposedly modest increase in capital expenditure. The concerns are well-intentioned but not well-grounded in reality.
To begin with, the hike in capex is not as modest as it appears to be. The actual capex in the current fiscal is Rs 10,18,429 crore, which will rise to Rs 11,21,090 crore in 2025-26; this is slightly more than 10 per cent. The rise in effective capex, however, is over 17.4 per cent—from Rs 13,18,320 crore in 2024-25 to Rs 15,48,282 crore in 2025-26. Effective capex comprises Central government spending on infrastructure and grants in aid for the creation of capital assets that go to states.
Of grants in aid, Finance Minister Nirmala Sitharaman has proposed an outlay of Rs 1.5 lakh crore as 50-year interest-free loans to states, but this is contingent upon reforms. This is in pursuance of the Central government’s policy of nudging states to carry out economic reforms.
Another point to be made here is that effective capex is almost as much as the fiscal deficit, which is Rs 15,68,936 crore. It is interesting to note that in 2023-24 effective capex was Rs 12,53,111, which was 32 per cent less than the fiscal deficit of Rs 16,54,643. This brings us to the quality of the fiscal deficit.
In a July 2024 paper, the National Institute of Public Finance & Policy (NIPFP), a premier research organization, said that the “quality of fiscal deficit continues to be a major concern. As per 2023-24 Union Budget, the share of the revenue deficit is expected to be around 53 percent of the gross fiscal deficit of the government of India.”
This share came down to 38.87 per cent this fiscal and has been estimated to further decline 33.39 per cent in 2025-26. The quality of the fiscal deficit has certainly improved.
The quantity of the fiscal deficit will also be lower in 2025-26 both in absolute and percentage terms, from Rs 15,69,527 in 2024-25, or 4.8 per cent of GDP, to Rs 15,68,936 in 2025-26 (4.4 per cent).
Higher capex, among other things, has helped the economy grow fast in the last few years; as per both government estimates and projections by external organizations like the World Bank and the International Monetary Fund, the momentum is likely to continue in the foreseeable future. One reason is that capex has a high multiplier effect. Responding to the debate on the 2022-23 Budget in the Rajya Sabha, Hon’ble Finance Minister Nirmala Sitharaman had said that every Rs 1 spent on capex has a multiplier effect of Rs 2.45 worth of multiplier in the immediate year, and Rs 3.14 worth of effect in the following year.
In the case of consumption, the multiplier effect is even higher. Prof K.V. Subramanian, IMF Executive Director and former chief economic advisor, recently said that with the proposed income tax cuts in the Budget there will be an increase in consumption of around Rs 5 lakh crore, as people will have around Rs 1 lakh crore more in their pockets, and the multiplier effect of consumption is 5.
People will have a higher spending power because of the substantial reduction in personal income tax; full exemption has been granted to individuals earning up to Rs 12 lakh annually. For salaried taxpayers, this threshold rises to Rs 12.75 lakh, factoring in the standard deduction of Rs 75,000. This move provides significant relief to the middle class and is expected to generate a ripple effect across the economy.
With higher disposable income, consumer spending is likely to rise, setting off a virtuous cycle of increased demand, enhanced business performance, higher investment, and greater indirect tax revenue. This surge in consumption will particularly benefit sectors such as retail, real estate, and automobiles, ultimately driving job creation and further economic growth.
All this, however, be predicated upon very high doses of liberalization. Thankfully, the government is cognizant of this reality. Economic Survey 2024-25, which was released a day before the Budget, said: “In many cases, current regulations are gold-plated, i.e. they are set with an inflated assumption of regulatory capacity and the capacity of regulated entities to comply. There is some scope for making many of the current regulations less restrictive, in line with comparable standards recommended by international bodies and adopted by other countries.”
In her Budget speech, the Finance Minister promised a “light-touch regulatory framework based on principles and trust” and FICCI looks forward to the same.
With emphasis on reforms and a commitment to fiscal prudence, the government can surely usher in an era of strong growth and comprehensive development.
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