GS Paper: GS3

PYQ Relevance: Q) One of the intended objectives of Union-Budget 15-18 is to ‘transform, energize and clean India’. Analyze the measures proposed in the Budget 15-18 to achieve the objective. (UPSC CSE 2017) Q) Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets. (UPSC CSE 2021)

 

Mentor’s Comment: UPSC mains have always focused on Sustainable Development (2016, 2017, 2018 and 2022), and Budget Initiatives (2017 and 2021).

The Union Budget 2024-25 presents a strategic framework aimed at fostering economic growth while addressing the needs of various sectors, particularly the middle class, agriculture, and employment. While efforts to streamline tax structures and reduce compliance burdens are positive, they must be accompanied by robust strategies to ensure sustainable growth and equitable distribution of resources.

The editorial emphasizes the urgent need for decisive and equitable action in addressing inclusive and sustained growth. This content can be used to present challenges/criticism for the present Budget 2025-26 in your Mains Answers for Economy and Infrastructure.

_

Let’s learn!

Why in the News?

The Union Finance Minister presented the Union Budget on February 1, addressing significant economic challenges while outlining an ambitious plan for ‘Viksit Bharat’ that focuses on various sectors, which although requires careful evaluation.

 

What are the key highlights from Budget 2025 that would raise the questions?

• Fiscal Consolidation Target: This target aims to reduce the fiscal deficit from the previous year’s estimate of 4.9% and reflects the government’s commitment to managing public debt while balancing necessary public expenditures and economic growth challenges.
  • The Budget sets a Fiscal Consolidation Target of 4.4% of GDP for FY26, relying on optimistic revenue projections, including 11.2% growth in total tax revenues and 14.4% in income tax revenues, despite significant tax cuts and economic challenges.
• Second Asset Monetisation Plan (2025-30): This plan aims to generate ₹10 lakh crore by monetizing government-owned assets. The proceeds from this monetization will be reinvested into new infrastructure projects.
  • Success of Second Asset Monetisation Plan (2025-30) after previous underperformance raises concerns, and ₹11.54 lakh crore in net market borrowings may crowd out private capital amid weak credit demand.
  • Additionally, the government has proposed ₹1.5 lakh crore in interest-free loans to states to further support capital expenditure and infrastructure reforms.
• Personal Income Tax: The revisions in income tax rates that exempt incomes up to ₹12 lakh can lead to a loss of ₹1 lakh crore in direct tax revenue due to the following reasons:

• Increased Exemptions: By exempting incomes up to ₹12 lakh, more individuals will not be liable to pay income tax, significantly reducing the overall tax base.
• Reduced Tax Rates: The new tax regime includes lower tax rates for various income brackets, which means that even those who do pay taxes will contribute less than they would under the previous regime.
• Impact on Government Revenue: The expected loss of ₹1 lakh crore in direct tax revenue will limit the government’s financial resources, constraining its ability to fund developmental initiatives and public services.
• Declining Household Savings: As the government foregoes this revenue, it may struggle to maintain or increase public investments, which could exacerbate the already declining household savings rate, impacting long-term economic stability.

• India’s Manufacturing Sector: The Budget aims to bolster India’s manufacturing sector, which currently contributes only 17% to the GDP, through various initiatives. However, significant challenges remain that could hinder the sector’s growth and competitiveness.
  • Regulatory Inefficiencies: By enhancing access to credit for MSMEs, the government aims to foster growth, but the existing regulatory framework often hampers business operations, leading to delays and increased costs that undermine competitiveness.
  • Low Innovation Capacity: The government has introduced PLIs targeting various sectors to encourage domestic production and attract foreign investment. However, the investment in R&D is critically low, currently at just 0.64% of GDP. This lack of focus on innovation limits the ability of Indian manufacturers to compete effectively.
  • Structural Weaknesses: The manufacturing sector has been plagued by structural weaknesses such as high costs of raw materials and logistics, which make it less competitive compared to other nations.
  • For example, steel prices in India are reported to be 20-30% higher than those in China.

What are the gaps highlighted by the budget that need to be recognized in the Agricultural Sector?

Significant Agricultural Initiatives taken by the Government in Budget 2025-26: 1. Prime Minister Dhan-Dhaanya Krishi Yojana: Objective: To enhance agricultural productivity and promote sustainable farming practices in 100 districts characterized by low productivity, moderate crop intensity, and below-average credit access. The initiative is expected to benefit approximately 1.7 crore farmers by providing them with better financial support and resources. The program will be executed in partnership with state governments, leveraging existing schemes and specialized measures to drive focused reforms. Key Focus Areas: Introduce advanced farming techniques and modern equipment. Encourage farmers to grow a variety of crops instead of relying on a single crop. Develop storage facilities at the panchayat and block levels to reduce crop wastage. Enhance irrigation infrastructure to increase agricultural output. Facilitate easier access to both short-term and long-term credit for farmers. 2. National Mission on High-Yielding Seeds: Objective: This mission aims to improve the availability and use of high-yielding seed varieties to boost agricultural productivity across the country. The mission emphasizes research and development in seed technology, ensuring that farmers have access to superior quality seeds that can lead to better crop yields. It will work in conjunction with other agricultural programs, such as the Dhan-Dhaanya Krishi Yojana, to maximize the impact on food security and farmer income. 3. Increased Kisan Credit Card (KCC) Limit: The loan limit for KCC has been raised from ₹3 lakh to ₹5 lakh, along with targeted support in 100 low-productivity districts, indicating a shift from blanket subsidies to more precise financial assistance for farmers.

• Short-Term Loan Focus: The emphasis on credit enhancements primarily through short-term loans may perpetuate farmers’ dependency on debt without resolving underlying issues.
  • Systemic inefficiencies in agricultural markets remain unaddressed, particularly regarding price volatility and market access.
• Missed Export Opportunities: The lack of concrete measures to promote agricultural exports, especially as India aims to lead in millets and natural farming, represents a significant missed opportunity.
  • Services exports, particularly in IT and business process outsourcing, are growing robustly at a 10.5% CAGR, but efforts to diversify the export portfolio are lacking.
  • While initiatives like Bharat Trade Net (BTN) and export credit support for MSMEs are positive, they lack the scale necessary to effectively address India’s ongoing trade deficits.
  • The depreciation of the rupee and declining foreign exchange reserves highlight the need for a more ambitious export strategy.
  • A fiscal push toward value-added sectors such as pharmaceuticals, electronics, renewable energy, and high-value agricultural products could enhance India’s position in global supply chains and improve export competitiveness.

What are the questions raised on other transformative and sustainable pushes?

Lithium-Ion Battery Recycling: Ace Green Recycling plans to establish India’s largest lithium iron phosphate (LFP) battery recycling facility in Gujarat, with a capacity of 10,000 metric tons per year by 2026.  Incentives for Clean Tech Manufacturing: The Budget introduces tax benefits and policy extensions aimed at supporting electric vehicle (EV) startups and clean tech manufacturing. This includes exemptions on cobalt powder and lithium-ion battery scrap from basic Customs Duty, which is expected to strengthen India’s battery recycling ecosystem.

• Despite these initiatives, the transition to a low-carbon economy remains fragmented due to insufficient investment in essential areas like grid modernization and energy storage.
• To achieve a successful transition to a low-carbon economy, India needs a more integrated approach that includes substantial investments in energy infrastructure alongside the current recycling initiatives.
  • For example, enhancing energy storage capabilities is crucial for managing the intermittent nature of renewable energy sources like solar and wind power.

Way Forward:

• While the Budget lays a promising foundation for economic progress, it requires a comprehensive approach that not only focuses on immediate tax relief but also addresses long-term challenges in productivity, innovation, and market access.
• The success of these initiatives will be measured by their ability to create lasting benefits for all segments of society, driving India toward its vision of a prosperous and inclusive economy.