Why India’s Budget has a limited, yet relevant, envelope of influence


For three reasons, the annual Union budget can only do so much to make a sizeable difference to the Indian economy:

One, policymaking is a round-the-year process and not concentrated in a singular annual statement like the Budget;

Two, states matter just as much, if not more, than the Centre; and,

Three, given its large debt and committed spending like salaries, the Centre has limited funds to try radical ideas.

Yet, even within that limited sphere of influence, the Union Budget has broad linkages with larger parts of the economy, leading to some second-order effects. Here are four of them, and how they play out:

1. Reviving private consumption

One objective of the government would be to make people spend more. Consumption expenditure, by one definition, is the main contributor to India’s gross domestic product (GDP). However, it has been subdued in the last two years. Not only has its share in GDP fallen below levels achieved during covid-19 recovery, it is also below pre-covid levels.

When consumption is subdued, companies are less willing to expand capacity and invest in new plant and machinery. For the Union government, this means finding ways, direct and indirect, of putting more money in people’s hands.

Also Read | Budget 2025: Lenders seek support to mobilise retail deposits, boost consumption

2. Supporting public sector enterprises

For some years now, a focus area in the Union Budget has been to increase capital expenditure—creation of new assets that have a multiplier effect on GDP. A key component of that is investing more in the 272 central government companies that were operational in 2023-24.

The good news is that since 2020-21, such equity support has increased about 4.5-fold. The bad news is that it is concentrated in just three sectors—railways, highways and telecom. For other government-owned companies, that means facilitating their growth by themselves, while channelling large chunks of their financial surplus back to the government as dividends.

Also Read: Budget 2025’s top priorities: Farmers, small businesses, consumption, and jobs

3. Financing welfare spending

The covid-19 pandemic reset the bar for central government spending on welfare schemes. In the last five years, the sum of expenditure on centrally sponsored schemes and central sector schemes—where welfare spending is budgeted for—has nearly doubled. Four of the main welfare schemes deal with food security, distress rural employment, rural housing and farmer incomes.

Given high levels of unemployment and weak consumption spending, the outlay on welfare spending is expected to remain high. To fund that, the Centre requires brisk growth in tax collections.

Also Read: Budget 2025: Capex target should be set at 3.1% of GDP

4. Transferring funds to states

The Centre shares a part of the taxes it collects with states, on the basis of a pre-set formula. For states, in a tax dispensation that essentially pivots around the concept of ‘one country, one tax’, this transfer becomes the key source of funds for all they want to do.

States have been getting increasingly vocal about what they see as increasing Union government reluctance to transfer funds from central coffers to states. They have a point. While in absolute terms, transfers have increased by about 4 trillion in the last five years, relative to the central government budget, they have fallen by 3 percentage points over this period.

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