There were high hopes from the just-presented Union budget 2025-26, given the challenges facing the economy. There have been consistent signs of a slowdown in the economy, rising unemployment and persisting high inflation.
These three macroeconomic features are interlinked. Unemployment and inflation together impact demand in the economy, and lead to slowdown in growth and rising inequality.
External challenges not in our control
The challenge before the economy is not only from within, but critically, from without. US President Donald Trump is out to “make America great again”. For this he is bullying nations, especially India, which he has called the “tariff king”. He is threatening to impose high tariffs on Indian exports as well as exports from China and even his closest allies. There is likelihood of a tariff war, supply disruptions and inflation kicking up globally.
With such uncertainty, the rupee has been declining compared to the dollar, foreign funds are flowing out leading to a decline in the stock markets, and foreign exchange reserves are falling. These will add to inflationary pressures in India.
Since this external environment is not in our control, we need to strengthen ourselves internally. The Economic Survey released a day before the budget echoes this thought.
Usually, there is a difference between announcements in the budget and analysis in the Economic Survey. This year is no different.
Budget proposals
The budget speech seemingly addresses the internal concerns by showing intent to tackle them. At the very outset, it presents its thrust: “accelerate growth, secure inclusive development, invigorate private sector investments, uplift household sentiments and enhance spending power of India’s rising middle class”.
Next it announces six things that ‘viksit Bharat’ needs. These cover education, health, ending poverty, etc.
If the message was not loud and clear, it announced ten broad areas “focusing on Garib, Youth, Annadata and Nari”. If one was still being sceptical and naive, it announced a focus on the “powerful engines: Agriculture, MSME [micro, small and medium enterprises], Investment and Exports” and so on.
Also read: No More a Modi Sarkar: 2025 Budget, Like Last Year’s, Bears Strong Imprint of Coalition Government
If one was not yet overwhelmed, in the next para, it said, “it aims to initiate transformative reforms across six domains”.
Clearly, this was the political thrust from the finance minister (FM) – announcing something for all sections of society.
Of course, the FM began with announcements for agriculture and MSMEs – representing the two biggest sections of the population and also the two most marginalised sections. If their incomes rise, the demand problem would be substantially taken care of, and so would growth and poverty.
Allocations
If a budget is to resolve any problem, it not only has to have announcements but also back them with substantial allocations – put the money where the mouth is. The budget fails in this regard.
Compared to 2023-24, expenditures in 2024-25 are short for agriculture and allied activities, education, rural development and urban development. So, in real terms, these allocations are substantially less than last year, and this happened last year (in 2023-24) also. There is no guarantee that this will not repeat, because who remembers the previous budget?
So, announcements may not be backed by expenditures and the goals so loftily announced may not be fulfilled.
But this is required by politics. Budgets typically announce grand schemes with fanfare, but their targets go unfulfilled. Take the PM Awas Yojana-Urban for housing. In 2023-24, Rs 21,684 crore was spent. Next year, in 2024-25, it was allotted Rs 30,171 crore – a 39% increase, making the budget look good. But only Rs 13,670 crore was spent.
Now the allocation for 2025-26 is Rs 19,794 crore, even less than what was spent in 2023-24. The Swachh Bharat Mission-Urban tells a similar story.
The Jal Jeevan Mission is a complete disaster – as if the nation has sorted out its drinking water problem. In 2023-24, Rs 69,992 crore was spent, and for 2024-25 Rs 70,163 crore was allotted. But the expenditure was Rs 22,694 crore – only 32% of the allocation.
Now, for 2025-26, Rs 67,000 crore is allocated, which is less than what was spent two years back.
It seems the greater the problem, the smaller the allocation.
The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is also down in real terms, since the allocation has not been raised. This is the most employment-intensive scheme and needed to be boosted since rural unemployment has been quite high post-pandemic.
In other words, all the schemes that cater to employment generation, like those related to education, health, rural development and agriculture as well as MGNREGS have faced cuts in real and at times even nominal terms.
If so, how does the FM plan to deal with the basic problems of demand and growth of the economy?
Focus
The FM is following supply-side policies, granting concessions to the well-off and the corporate sectors. The big income tax relief announced is ostensibly for boosting demand from the middle class.
But as has been repeatedly stated by this author, this tax cut will benefit not more than three crore individuals.
According to the FM, the tax foregone due to concessions in direct taxes will be about Rs 1 lakh crore. This will surely benefit the organised sector.
This tax foregone coupled with lower fiscal deficit will mean less expenditures elsewhere as depicted in the previous section on allocations. So, the gain in demand from the well-off would be overwhelmed by the decline in demand in the unorganised sector. After all, the well-off save while the poor spend almost everything.
So, a shift in incomes from the poor to the well-off (tax payers) would lead to the lowering of demand.
The government has to realise that the demand problem cannot be taken care of by supply-side responses. Unfortunately, the government’s inclination is to give concessions to big businesses. This was also evident during COVID times in the Atmanirbhar Bharat package.
Such a misconception of the country’s internal problems will only aggravate them. So, our ability to handle external challenges posed by the US and the rapid rise of AI will be further degraded.
In brief, one needs to question the macro direction of the budget. It cannot be camouflaged by making the well-off sections, who are the opinion-makers, happy through income tax cuts.
Arun Kumar is author of Indian Economy Since Independence: Persisting Colonial Disruption.
