Budget 2025-26: Will It Boost Growth and Employment? | Ajit Kumar Singh

Shrimati Nirmala Sitaram presented her eighth budget in succession on 1st February 2025. The Budget in her words continues the Government’s efforts to: a) accelerate growth, b) secure inclusive development, c) invigorate private sector investments, d) uplift household sentiments, and e) enhance spending power of India’s rising middle class. This paper critically examines the impact of the budget on these goals with particular reference to economic growth and employment generation.

Conservative Fiscal Stance

The budget for 2025-26 envisages a total expenditure of Rs. 50.65 lakh crore, out of which revenue expenditure is Rs. 39.44 lakh crore and capital expenditure Rs. 11.21 lakh crore (Table 1). The budget adopts a conservative approach to expenditure. The expenditure proposed for 2025-26 is only 7.4 per cent higher than the revised expenditure for 2024-25 and only 5 percent higher than 2024-25 budget estimate. With inflation in the range of 5 per cent, this amounts to a marginal change in real terms. The fact is that the ratio of public expenditure to GDP has been continuously going down. It reached a peak of 17.7 per cent in 2020-21 but subsequently came down to 15 per cent in 2023-24 and is pegged at 14.2 per cent for 2025-26. When the economy is facing a shortage of demand a more liberal approach to public expenditure was called for.

Table 1: Revenue and Capital Expenditure (Rs. Crore)

Source: Budget Papers 2025-26

The government appears to be committed to fiscal consolidation by compressing government expenditure particularly on capital account. The gross fiscal deficit was 5.6 per cent of GDP in 2023-24 and is expected to be 4.8 per cent according to revised estimate for 2024-25. It is proposed to reduce it further to 4.4 per cent of GDP in 2025-26. The revenue deficit is targeted to come down from 1.9 per cent of GDP to 1.3 per cent of GDP in 2025-26. Thus, the budget is not expected to boost up demand in the economy, which was the need of the hour.

In the previous budget the government banked upon hefty increase in capital expenditure to boost economic growth. But the capital expenditure proposed in 2025-26 is only 1 per cent higher than the budget estimate of 2024-25. The proportion of capital expenditure has also come down from 23 per cent to 22.13 per cent.

The Divergence Between Budget Estimates and Revised Estimates

It is also noteworthy that the government is not able to meet its revenue and expenditure targets. The revised expenditure for 2024-25 is lower by as much as Rs. 1.04 lakh crore (2.16%). There was a shortfall of Rs. 92,682 crore in capital expenditure, that is, 8.3 per cent lower than the budget estimate. The shortfall in case of revenue expenditure was Rs. 11,343 crore.
As shown in Table 2 the divergence between budget estimates and revised estimates of revenue for 2024-25 were quite glaring. Though income tax receipts exceeded the budget estimate by a whopping Rs. 79,000 crore (6.7%), there was a shortfall of as much as Rs. 40,000 crore (3.9%) in corporation tax. Similarly, union excise duties fell short of estimates by Rs. 14,000 crore (4.4%) and custom duty by Rs. 2,745 crore (1.2%). The shortfall in non-tax revenue was Rs. 14,701 crore (2.7%). Capital receipts also show a sharp fall of Rs. 19,000 crore (24.4%). from estimates. Borrowings fell short of projections by as much as Rs. 43,785 crore (2.7%).

These marked divergence between budget estimates and actual revenue and expenditure indicate the declining quality of budget making and incapacity of the government to monitor its revenue and expenditure targets closely. Mere allocation of funds to particular schemes becomes meaningless if the targets are not met.

Table 2: Sources of Revenue (Amount in Rs. Crore)

Source: Budget Papers 2025-26.

Similar story is present in case of allocation and utilization of funds to various ministries (Table 3). The revised estimate of expenditure exceeded the budget allocations in 2024-25 in case of Ministries of Chemical and Fertilisers (108%), Agriculture and Farmers Welfare (6.5%), Communications (9.4%) and Defence (3.1%). On the other hand, there is expected to be a sharp fall in the utilization of funds in case of the Ministries of Jal Shakti Mission (47.8%), Housing and Urban Development (22.9%), Education (5.5%), Consumer Welfare (4.7%), Rural Development (2.4%) and Health (1.1%). Needless to say that all these ministries have an important effect on the quality of life of the people.

Table 3: Ministry wise Expenditure (Rs. Crore)

Source: Budget Papers 2025-26.

We also find large shortfalls in the utilization of funds in case of the major Centrally Sponsored Schemes (Table 4). The shortfall was as much as Rs. 47,469 crores (67.7%) in case of Jal Jeevan Mission and Rural Drinking Water Mission, Rs. 22,074 crore (40.5%) in PM Awas Yojana rural, Rs. 15,001 crore (49.72%) in PM Awas Yojana Urban, Rs. 3201 crore (32% in New Employment Generation Schemes, Rs., 1129 crore (5.3%) in Saksham Aganwadi and Poshan 2 and Rs. 4500 crore (23.7) in PM Gram Sadak Yojana.

Table 4: Expenditure on Major Central Schemes (Rs. Crore)

Source: Budget Papers 2025-26.

Impact of Income Tax Relief

Much has been talked about the income tax relief provided to the tax payers by raising the exemption limit to Rs. 12 lakh. The middle class is indeed happy as they were reeling under the impact of high prices and slow growth in income. The questions to be asked here are how big is the tax relief and what will be its impact on demand. The government is likely to forgo income tax revenue by Rs. 1 lakh crore. This is much less than the relief of Rs. 1.6 lakh crore given to the Corporate sector six years ago. Moreover, the gain is likely to be temporary as the salaries are going to be raised with the implementation of the Eighth Pay Commission from 1 January 2026, which will bring a large number of employees above the exemption limit. In fact, the government itself is expecting an increase in income tax revenue from Rs. 12,57,000 crore in FY 2025 to Rs. 14,38,000 crore. What government has done is to forgo a part of the expected increase in income tax revenue. This would also imply that the actual tax burden on the tax payers would be higher unless a large number of new tax payers are brought within the tax net. It is also not certain how much of this relief will be used by the income tax payees to increase their expenditure. Part may go into savings and part may be used to pay off the debts incurred. Thus, the overall impact of IT relief will have only a marginal impact on total demand. This may not induce higher investment by business class as already there is excess capacity in the system.

The income tax relief affects only 30 million out of the 600 million work force in India. The real income of the majority in the informal sector remains stagnant. In fact, as the Economic Survey points out that wages in the informal sector have stagnated over the last five years. Unless the income of the large masses in the informal sector increases the demand push to economic growth will remain weak. The real challenge is to increase the real income and productivity in the informal sector and agriculture.

The government is hoping that the private sector will come in to fill the investment gap, which the private sector is reluctant to do in the present circumstances. The government has increased the borrowing limits for farmers and SMES in the hope that they will investment more and generate additional income and employment. On the whole, the impact of these measures on economic growth is likely to be small. The government itself has estimated a nominal GDP growth rate of 10.1% in 2025-26. If inflation is pegged at 4 per cent, this implies a growth rate of only 6.1 per cent in real terms against a growth of 6.4 per cent in 2024-25. The Economic Survey 2024-25 expects that the growth in FY26 would be between 6.3 and 6.8 per cent, that is roughly at the same level as in FY25. Thus, the government itself is not hopeful that this budget will push up economic growth in the coming year.

Conclusion

With such a modest economic growth the economy is not likely to generate high employment. In fact, the Budget speech does not talk about the three employment generation schemes launched last year. Against an allocation of Rs. 10,000 crore on these schemes actual expenditure was only Rs. 6,799 crore in 2024-25. It is proposed to increase this to Rs. 20,000 crore in FY 26. The government has proposed incentive to labour intensive industries like leather and textiles. However, given the low increase in governments infrastructure projects, the overall impact of the budget on employment will be small. Thus, it may be concluded that the budget for 2025-26 will not help in pushing up economic growth or generating higher employment.

(Author: Ajit Kumar Singh is former Director of the Giri Institute of Development Studies, Lucknow)