The upcoming Budget 2025-26 comes in the backdrop of a discernible slowdown in growth, compounded by continuing sluggishness in consumption indicators and middling private investments. North Block officials engaged in the Budget-making exercise are learnt to be weighing the option of tweaks in income tax rates at lower income levels, a proposal that was considered in the July Budget but failed to pass muster, alongside a bevy of incentives for micro, small and medium enterprises (MSMEs). The support for the MSME sector is being seen as crucial, given its outsized influence in large-scale employment and in India’s labour-intensive exports, people in the know said. A rationalisation of import duties, especially on intermediate products, in the context of the Trump-led administration taking charge in Washington is also under discussion, which could go in tandem with a Commerce Ministry-led initiative to prepare a plan to calibrate the leeway in reducing tariffs on items imported from the US, the person quoted above said. Even though it’s not a part of the Union Budget, the government may also reiterate its intent to rationalise the Goods and Services Tax (GST) structure, but that could only be indicative and likely to remain a broad statement of intent. Easier access to credit, extension of incentives and subsidies to MSMEs, have featured in the internal discussions in the government in the run-up to the Budget. “There is a concern about the high tax incidence at lower income levels and that has come up during internal discussions for the Budget. Estimates have been drawn about the marginal income tax rates and some relief is being considered for those earning less and senior citizens,” a person aware of the discussions said. An earlier proposal within the Finance Ministry involving income tax rate cuts for those earning less as a measure to enhance disposable income and boost consumption had not found space in the Budget of the new government in July after the Lok Sabha elections. The room to manoeuver on the revenue front is, however, seen limited with no significant progress on mobilisation of other resources such as asset monetisation and disinvestment. Multiple economists, including those who have met with North Block officials in the run-up to Budget 2025-26, are also of the view that the government should stick to fiscal prudence. A Budget with a balanced fiscal path is seen as being critical to provide space for the monetary policy to ease a bit, given the signs of a credit growth slowdown. “We expect the Budget to adopt a balanced approach to boosting growth while retaining fiscal prudence. This should keep India’s fiscal risk premia low and provide greater leeway to the RBI to begin lowering its policy rate at the February MPC (monetary policy committee),” economists at Nomura said in a note. The rate of increase in capital expenditure by the Centre will also be a critical factor coming after a slowdown in spending in the current financial year, primarily affected due to the elections held in the first three months of the fiscal along with weather impact from heavy rains. Industry is expecting the government to continue with its capex push, which it believes will help crowd in private investment. “The Union government should increase capital expenditure by 25 per cent in FY26 while staying within the fiscal glide path, Confederation of Indian Industry (CII) president Sanjiv Puri had told The Indian Express in an interview earlier this month. The focus is expected to continue on the interest-free loans for capex to states as the on-ground impact is more widespread at the state level, even though the conditions for the loans to states might be tweaked further. To meet its fiscal objectives, the government is expected to rely on the dividend from the central bank, even as the Reserve Bank of India (RBI) is tackling the slide in the Indian currency that is seen affecting its balance sheet size. “Reliance on RBI dividends is likely to remain high in FY26 to achieve fiscal consolidation. Central government fiscal consolidation — from 9.2 per cent of GDP in FY21 to a likely 4.8 per cent of GDP in FY25 — has been driven by improved tax collection, a reduction in unproductive expenditure, and high dividend flows from the RBI. Reliance on RBI dividends has usually been between 0.1-0.4 per cent of GDP; however, this increased significantly to 0.65 per cent of GDP in FY25. Reliance on RBI dividends is likely to remain high at 0.50-0.55 per cent of GDP in FY26 as well, to continue on the path of fiscal consolidation,” Standard Chartered said in a recent note.
