Introduction
Fiscal policy plays a critical role in shaping India’s economic landscape by determining government expenditure, taxation policies, and public debt management. In 2025, India’s fiscal policy is focused on balancing economic growth, controlling inflation, and ensuring long-term sustainability while maintaining fiscal prudence.
Understanding Fiscal Policy in India
Fiscal policy refers to the government’s strategies concerning taxation and public spending to influence the country’s economic activity. It consists of:
- Revenue Generation:
- Taxes (direct and indirect), non-tax revenues, and disinvestment proceeds.
- Public Expenditure:
- Developmental and non-developmental spending, subsidies, and capital investments.
- Public Debt Management:
- Fiscal deficit, borrowings, and repayment of debts.
Fiscal policy is an essential tool for maintaining economic stability, fostering growth, reducing income inequalities, and funding public welfare programs.
Key Fiscal Indicators in 2025
The Indian government has been striving to maintain a balance between expenditure and revenue generation. Below are some of the key fiscal indicators:
| Indicator | Value (2025) |
|---|---|
| Fiscal Deficit (Target) | 5.9% of GDP |
| Revenue Deficit | 3.3% of GDP |
| Primary Deficit | 2.1% of GDP |
| Public Debt to GDP Ratio | 85% (approx.) |
| Capital Expenditure Growth | 11.1% YoY |
The fiscal deficit remains a crucial concern, though the government is focusing on capital expenditure to ensure long-term economic benefits.
Major Reforms in Taxation
Taxation is a major component of India’s fiscal policy. The 2025 Union Budget introduced significant changes in income tax slabs, indirect taxes, and corporate tax reforms.
Income Tax Reforms
To provide relief to taxpayers and boost disposable income, the government has revised the income tax slabs under the new tax regime:
| Income Range (₹) | New Tax Rate (2025) |
|---|---|
| Up to 4,00,000 | 0% (Exempt) |
| 4,00,001 – 8,00,000 | 5% |
| 8,00,001 – 12,00,000 | 10% |
| 12,00,001 – 16,00,000 | 15% |
| 16,00,001 – 20,00,000 | 20% |
| 20,00,001 – 24,00,000 | 25% |
| Above 24,00,000 | 30% |
Additional Tax Benefits:
- Standard Deduction Increased:
- From ₹50,000 to ₹75,000.
- Higher Exemptions for Senior Citizens:
- Tax-free interest earnings threshold increased.
Corporate Taxation
- The corporate tax rate remains at 22% for domestic companies and 15% for new manufacturing companies.
- Rationalization of TDS/TCS:
- Increased exemption limits on various transactions.
- Incentives for Startups:
- Tax holiday extended for eligible startups until 2027.
GST and Indirect Tax Reforms
- Rationalization of GST slabs to simplify compliance.
- Customs duty reductions on raw materials to promote domestic manufacturing.
- GST input credit processing is now automated for faster refunds.
Government Expenditure and Budget Allocation (2025-26)
A significant portion of the government’s budget is directed towards infrastructure, defense, health, and education.
| Sector | Budget Allocation (₹ Crore) | % of Total Budget |
|---|---|---|
| Finance & Revenue | 19,39,001 | 38.3% |
| Defense | 6,81,210 | 13.4% |
| Road Transport & Highways | 2,70,435 | 5.3% |
| Railways | 2,52,300 | 5.0% |
| Health & Family Welfare | 95,000 | 1.9% |
| Education | 1,12,000 | 2.2% |
The government has increased capital expenditure by 11.1% YoY, focusing on infrastructure development and economic growth.
Key Fiscal Policies and Economic Stimulus
Infrastructure Development
- PM Gati Shakti Plan:
- ₹1.2 lakh crore allocated for infrastructure modernization.
- Railway Electrification:
- 1,000 km of new railway electrification targeted in 2025-26.
- Affordable Housing:
- Expansion of PM Awas Yojana with ₹50,000 crore funding.
Support for Agriculture
- Increase in Minimum Support Price (MSP) for key crops.
- Kisan Credit Card (KCC) extended to fishermen and dairy farmers.
- PM Dhan-Dhaanya Krishi Yojana launched for precision farming.
Social Welfare and Employment
- MNREGA Allocation:
- ₹80,000 crore to support rural employment.
- Free Food Grains Scheme extended for another year under PM Garib Kalyan Yojana.
- Skill India 2.0:
- ₹10,000 crore for skill development programs.
Green Energy & Climate Change Initiatives
- ₹30,000 crore allocated for solar energy and hydrogen energy projects.
- Electric Vehicle (EV) Incentives:
- 50% import duty cut on lithium-ion battery components.
- Launch of India Green Bonds to finance renewable energy projects.
Fiscal Deficit and Borrowing Strategy
Despite increasing expenditures, the government is committed to reducing the fiscal deficit to 5.9% of GDP by the end of FY 2025-26.
Strategies for Deficit Management:
- Privatization & Disinvestment:
- ₹1.2 lakh crore targeted from PSU disinvestment.
- Increased GST Compliance:
- Use of AI for tax fraud detection.
- Boost in Direct Tax Collections:
- Due to economic growth and better compliance.
Global Economic Impact and IMF Recommendations
- The World Bank has recommended reducing import tariffs to boost trade openness.
- The IMF has advised India to allow more exchange rate flexibility for economic stability.
- India’s GDP growth is expected to remain above 6%, fueled by domestic consumption and exports.
Key Differences Between Monetary Policy and Fiscal Policy
Monetary policy and fiscal policy are two key economic tools used by governments and central banks to regulate a country’s economy. While both aim to achieve economic stability and growth, they differ in their approach, implementation, and areas of focus.
| Feature | Monetary Policy | Fiscal Policy |
|---|---|---|
| Definition | The process by which the central bank controls money supply and interest rates to influence the economy. | The government’s use of taxation, public spending, and borrowing to influence economic conditions. |
| Implemented By | Central Bank (RBI in India). | Government (Ministry of Finance in India). |
| Main Tools | – Interest rates (Repo Rate, Reverse Repo Rate).- Open Market Operations (OMOs).- Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). | – Taxation (Income tax, GST, Corporate tax).- Government spending on infrastructure, welfare, and subsidies.- Borrowing through bonds and fiscal deficit management. |
| Purpose | – Control inflation or deflation.- Stabilize currency value.- Encourage or discourage lending. | – Boost economic growth.- Reduce unemployment.- Provide public goods and services. |
| Effect on Economy | – Short-term impact.- Directly affects interest rates and borrowing costs. | – Medium to long-term impact.- Directly affects government revenues and spending. |
| Flexibility | Quick adjustments possible (e.g., changing repo rates). | Takes time due to political and legislative processes. |
| Examples in India (2025) | – RBI increased the repo rate to curb inflation.- RBI infused liquidity through Open Market Operations (OMO). | – Government increased infrastructure spending.- New tax reliefs announced for middle-class taxpayers. |
How They Work Together ?
Monetary and fiscal policies complement each other to ensure economic stability. For example:
- If inflation is too high, the RBI (monetary policy) may increase interest rates, while the government (fiscal policy) may reduce spending.
- If economic growth is too slow, the RBI may lower interest rates to encourage borrowing, while the government may increase public spending to boost demand.
Both policies are crucial for a well-functioning economy. While monetary policy is more about managing money supply and inflation, fiscal policy focuses on taxation and government expenditure. The right mix of both helps maintain economic stability, growth, and employment.
Challenges & Future Outlook
While India’s fiscal policy is aimed at economic growth and financial stability, it faces several challenges:
Challenges:
- High Public Debt:
- A debt-to-GDP ratio exceeding 85% raises concerns.
- Global Inflationary Pressures:
- May impact import costs.
- Rural Distress:
- Uncertain monsoon patterns affecting agriculture.
Future Outlook:
- The government aims to lower the fiscal deficit to 4.5% by 2028.
- Strengthening digital tax collection mechanisms.
- Continued investment in AI-driven governance and compliance.
Conclusion
India’s fiscal policy in 2025 is focused on taxation reforms, infrastructure development, social welfare, and economic growth while keeping an eye on fiscal discipline. The emphasis on capital expenditure, green energy, and digitalization will play a crucial role in driving India’s economic resilience.
With continued policy support and structural reforms, India is on track to become a $5 trillion economy in the coming years. However, fiscal consolidation, efficient tax collection, and strategic investments will be key to achieving sustainable growth.
