Union Budget 2025 Leaves India’s Economy To Flounder

The budget addresses the slowing economy the way a caregiver, who has run out of medicines, tends to a sinking patient with a happy story. You cannot offer a cure for loss of economic momentum, but you can hope to raise a smile by giving tax breaks. Economists and analysts will be disappointed by the absence of hoped-for growth boosters. But a vocal segment of voters would cheer the budget, as it puts additional money in their pockets.

Are there budgetary outlays to boost growth? The capital expenditure proposed for the current fiscal was Rs 11,11,111 crore. Numerology did not quite help. The actual spending was nearly Rs 1 lakh crore lower. Next year’s capex allocation is lower, as a proportion of GDP, than the current fiscal’s had been.

Tax Dole Outs

Is there a fleshed-out plan to mobilise private sector investment? No, if you don’t mistake a call to all infrastructure ministries to come up with public-private partnership projects as unleashing investment here and now.

What the budget offers are tax breaks that would make taxpayers feel some relief. At an individual level, any additional money left in your pocket as a result of a smaller tax burden would be immensely welcome. Depending on your level of income, the tax saving can be anything up to over Rs 1,00,000. But at the aggregate level, the tax giveaway is Rs 1,00,000 crore or 0.2% of the GDP. And if the beneficiaries of this tax benefit plough all that money into additional consumption — there is no guarantee of that, as household indebtedness is up and people might choose to pay down debt with the tax rupee saved — consumption demand would go up by that much.

The budget represents the totality of the government’s expenditure, and that is slated to come down by 0.3% of GDP, from the level estimated to have been achieved this fiscal: the total expenditure moving from 14.55% of GDP to 14.19% of GDP between 2024-25 and 2023-26.

Strategy Shift?

This is, in effect, a budget that marks time, preparing for a shift in strategy from state-funded growth to private sector-funded growth, by reviving the public-private-partnership (PPP) model that the previous UPA government had used effectively to keep the share of gross fixed capital investment in the economy at 33-35% of GDP. Post-the UPA, the GFCF/GDP ratio has mostly stayed below 30% of GDP and touched 30% only briefly.

If the budget just marked time, voters would not be pleased. So, the budget doles out tax breaks to the middle class, and hopes that no one would notice that nothing much is being done to boost growth — except for pesky analysts and commentators, and who cares for them, anyway? Some of them can be made to find solace in the shrinking of the fiscal deficit. The gross fiscal deficit is slated to come down to 4.4% of GDP, from the 4.9% budgeted for 2024-25 and the 4.8% likely achieved.

The US, we may note in passing, is running a fiscal deficit of 6.5% of GDP, and France, of 6% of GDP. The world, of course, is more tolerant of rich world dependence on borrowings than it is of fiscal indiscipline in the developing world.

Is the economy ready for a big revival in private investment? A lower fiscal deficit does leave greater room for the private sector to tap into the available pool of savings in the economy. But, since capacity utilisation has been stuck at below 75% for a decade, is it realistic to expect the private sector to start investing on a large scale?

They will not invest in adding to their own capacity. But corporate India could invest in infrastructure, if policy is innovated to encourage their re-entry into infrastructure. PPP had been effective under the UPA, in coagulating large amounts of private investment in new ariports, ultramega power projects, highways and townships. But PPP also turned into a paradigm of corruption in the propaganda that unseated the UPA government and brought in the successor NDA regime.

PPP Alone Can’t Revive Growth

The NDA reviled PPP, and relied on direct state funding to boost economic growth. Now, it is changing tack, and that is welcome. But growth is not a spirit that can be summoned by chanting a mantra, even a powerful mantra like PPP.

How PPP contracts are designed matters a lot. Ram Singh, who is currently the director of the Delhi School of Economics, has studied PPP highway projects. He finds that when the responsibility for maintenance and the possibility of collecting tolls are rolled into the same contract to build highways, more money goes into the original investment, so that the need for maintenance is minimised, and time overruns are minimised.

The Mayawati government of Uttar Pradesh got the Jaypee group to build the Delhi-Agra Expressway without spending government money. The developer financed road construction with the capitalised proceeds from the townships he got to build along the expressway, with the government acquiring the land from the farmers and handing it over to the developer. While there were protests and even police firing, eventually, consensus was reached on the farmers being compensated for the land they had to give up to the developer in the form of a share of the developed land being returned to them.

How airport development projects are assigned, that is, the parameter used to award such contracts, matters. So many airport projects were awarded to one company, not because that company rigged any bids, but because it bid to give the government the most revenue per passenger. The bid parameter was poorly designed — how many rupees per passenger would the developer pay the government. A developer who is confident of his clout in the government system can bid without a ceiling on the amount: it is confident of swinging a proportionate rise in airport development charges or passenger user fees or any such thing, and raising the airport revenue to pay off the government and still make fancy profits from what remains. Those without such assured clout cannot adopt such a strategy. The bid parameter needed to have multiple elements, including ones that minimize cost.

PPP is a good way to revive growth, but it calls for intelligent design and policy. Detailed project reports have to be prepared and finalised. Then comes the question of financing. That will take at least a year.

So, the Budget leaves the economy to flounder this year, buffetted by Trumpian trade wars and financial flows triggered by Trump's effects on the US fiscal deficit and inflation. But the taxpayers can watch this struggle with a smile.