Mentor’s Comment: UPSC mains have always focused on the Capital Budget and Revenue Budget (2021), and the objectives of Union-Budget (2017).

The Union Budget’s forecast of 10.1% nominal GDP growth for 2025-26 seems reasonable, based on the Economic Survey’s prediction of 6.3%-6.8% real GDP growth. Although capital spending has gone up, it’s similar to last year’s budget. The Budget aims to drive growth towards becoming a developed nation, though some measures, like tax relief, could have come sooner.

Today’s editorial talks about the measures taken in the Budget. This content would help in GS paper 3 in the economy section.

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Let’s learn!

Why in the News?

Some measures in the Budget should have been introduced earlier and replacing ‘fiscal deficit’ as a key indicator is a wrong decision.

How realistic are the government’s tax revenue growth assumptions?

• Gross Tax Revenue (GTR) Trends: The growth in the Government of India’s GTR has been trending downwards in recent years. The buoyancy of GTR has fallen for three successive years from 1.4 in 2023-24 to 1.15 in 2024-25 (RE) and then to 1.07 in 2025-26 (BE). As a result, growth in the Government of India’s GTR has kept falling from 13.5% in 2023-24 to 11.2% in 2024-25 (RE), and to 10.8% in 2025-26 (BE). Within the government’s tax revenues, the growth rate of Goods and Services Tax (GST) has also fallen from 12.7% in 2023-24 to 10.9% in 2025-26 (BE).
• Shift to Direct Taxes: The structure of the government’s taxation has moved from indirect to direct taxes, with the share of direct taxes in the government’s GTR increasing from 52% in 2021-22 to 59% in 2025-26 (BE).
• Personal Income Tax: There has been a fall in growth from 25.4% in 2023-24 to 20.3% in 2024-25 (RE) and 14.4% in 2025-26 (BE). This fall in growth in 2025-26 (BE) is partly due to the announced income-tax concessions.
• Corporate Income Tax: The growth in 2024-25 (RE) is quite low at 7.6%. This growth has been raised to 10.4% in 2025-26 (BE).

Is the level of government expenditure appropriate, and is its composition efficient?

• Overall Expenditure: The government is estimated to spend Rs 50,65,345 crore in 2025-26, 7.4% higher than the revised estimate of 2024-25. The size of government expenditure as a percentage of GDP has been reduced from 14.6% in 2024-25 (RE) to 14.2% in 2025-26 (BE). Growth in total expenditure, at 7.6% in 2025-26 (BE), is lower than the budgeted nominal GDP growth at 10.1%.
• Capital Expenditure: Capital expenditure has been raised from 11.11 lakh crore rupees in the current fiscal year to 11.21 lakh crore rupees for the oncoming fiscal year1. There has been a steady improvement in the quality of government expenditure as the share of capital expenditure in total expenditure has been improving. This share has improved by 10% points over the period from 2020-21 to 2025-26 (BE).
• Investment in Key Areas: Investment remains a central theme in the Budget, categorized into three key areas—people, economy, and innovation.
  • Investment in people: Includes the establishment of Atal Tinkering Labs, broadband connectivity for schools and health centers, Centers of Excellence for Skilling, and initiatives for Gig workers.
  • Investment in the economy: Focuses on infrastructure projects, interest-free loans to states for capital expenditure, asset monetization, and urban redevelopment projects.
  • Investment in innovation: Allocates funds to private sector-driven R&D initiatives and missions to support urban planning and knowledge systems.
• AI Infrastructure: The Government of India has to build up large-scale Artificial Intelligence (AI) infrastructure in order to facilitate the adoption of emerging technologies.

⁠Is the shift away from using fiscal deficit as a primary indicator of fiscal prudence a positive step?

• Change in Indicator: One measure introduced in the Budget is to move away from fiscal deficit as an indicator of fiscal prudence. The practice of giving a glide path in terms of fiscal deficit is being discontinued. It has been stated that from now on, the focus will be on reducing the debt-GDP ratio annually.
• New Target: The central government aims to reduce its outstanding liabilities to around 50% of GDP by March 2031.
• Debt-GDP Ratio: In the 2025-26 Budget, the practice of giving a glide path in terms of fiscal deficit is being discontinued. Alternative paths of the debt-GDP ratio with nominal GDP growth assumptions of 10.0%, 10.5% and 11.0% are given.
  • The glide paths are indicated in terms of alternative growth assumptions and alternative assumptions regarding mild, moderate, and high degrees of fiscal consolidation. This makes the whole exercise vague and non-transparent.
• Fiscal Deficit Target: The fiscal deficit target for FY26 is set at 4.4% of GDP, revised down from 4.8% in the current financial year.

Way forward: 

• Restore Fiscal Deficit Transparency: Reintroduce clear fiscal deficit targets with specific timelines, instead of focusing solely on the debt-GDP ratio. This would ensure greater clarity and accountability in fiscal management.
• Enhance Investment Efficiency: Prioritize strategic investments in key areas like AI infrastructure, R&D, and innovation, while ensuring these investments align with long-term growth goals and contribute to overall economic resilience.

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