Context:
The personal income tax relief is the most important feature of the Union Budget for 2025-26, which can boost private consumption while keeping a check on fiscal discipline. Another important feature is the shift in using the debt to GDP ratio as a fiscal anchor, that is, the long term stability measure.
Fiscal Deficit & Debt to GDP Ratio
- Gross Fiscal Deficit (GFD) Target
- It has been 4.4% for FY26, better than the target of 4.5% from 2021.
- Fiscal Anchor Switched to Debt to GDP Ratio
- The government wants to bring the debt to GDP ratio to 50% by March 2031.
- This shift is positive for fiscal stability because liabilities are being better managed.
- Risks
- The balance of the current account is also more relevant in terms of interest payment fluctuations while excluding the entire fiscal balance.
- Any large increase in the interest rate is likely to destroy the debt to GDP projections hence challenging the practice of fiscal discipline.
Personal Income Tax Relief & Private Consumption
- Significant relief in the personal income tax will boost private spending.
- This is a very important move in a backdrop of global uncertainties and a stagnant private capex cycle.
- The developments have been offset by no growth in government capital expenditure. It remains almost invariant vis à vis last year’s Budget Estimates (BE).
Corporate Tax Collections & Private Sector Investment
- Corporate tax revenue declining
- Share in total revenue receipts declined from 42.7% in FY19 to 31.6% in FY26 (BE).
- The corporate tax cuts of 2019 have not yet improved revenue collection.
- Private sector’s role in investment
- Government has led public sector capex in recent years, but private corporate investment remains weak.
- If private companies do not step up capex, it could lead to macroeconomic challenges.
Self Reliance in Pulses: Aatmanirbharta Mission
- Six year mission for self reliance in pulses, focusing on tur, urad, and masoor.
- Pulses are highly volatile in price, contributing to food inflation.
- Since the greatest consumer of pulses lies in India and as such the imports are severely curbed, thus obtaining food self sufficiency will require that all sectors come closer towards a desired extent of accomplishment towards that direction and become all important.
Central vs State Fiscal Relations & Tied Transfers
- Centrally Sponsored Schemes (CSSs)
- Their allocation would rise by an unprecedented 30.5% in FY26 but at merely 7.6% BE to BE basis.
- CSSs do not allow states to spend resources at their discretion.
- Tied vs Untied Transfers
- The ratio of tied transfers (Article 282) to untied transfers (Article 270/275) will rise to 34.8% in FY26, ending the downward trend witnessed over the past few years.
- Issue
- This undermines state level fiscal independence, as CSSs constrain state spending flexibility.
