FY25-26 Union Budget: Balancing Fiscal Prudence with Growth Reforms

The FY25-26 Union Budget is set to focus on fiscal prudence while targeting growth through selective reforms. Key highlights include modest growth in capital expenditure, predicted changes in fiscal deficit, and strategic allocations expected to benefit various sectors, from rural economies to healthcare, despite challenges like disinvestment shortfalls.

The Union Budget for fiscal years 2025-2026 is likely to emphasize fiscal prudence alongside measures to stimulate growth, according to a report from Phillip Capital. It underscores sustained investment in key infrastructure such as railways, roads, and defense, though a significant rise in overall capital expenditure is unlikely.

Phillip Capital anticipates the fiscal deficit to be between 4.5 and 4.6 percent of GDP for FY26, slightly lowering from the 4.6 to 4.7 percent expected closure for FY25. Should the government choose fiscal expansion in FY26, hiking the deficit to 4.7-4.8 percent, the report foresees growth-focused initiatives.

For FY25, the fiscal deficit is projected to stay below the budget estimate, at 4.66 percent compared to the predicted 4.94 percent. This is due to robust tax collections and higher RBI dividends, although disinvestment income may fall short of its Rs500 billion target by a considerable margin, while subsidies for fertilizers and petroleum are expected to exceed initial forecasts.

The gross tax revenue is forecasted to increase by 10 percent, aided by income tax and GST buoyancy, though reduced RBI dividends from FY25 may constrain expenditure growth. Disinvestment targets might be set around Rs500 billion, yet actual figures might stagnate at Rs250 billion, aligning with prior performance levels.

Spending is expected to rise by 6.4 percent, with a notable 19 percent boost in capital expenditure for FY26. However, moderated revenue expenditure growth at 3.2 percent is expected due to stable subsidies and fiscal discipline. Various sectors like FMCG, agriculture, and healthcare are set to benefit from increased fiscal allocations and tax reforms.

Additionally, changes in income tax exemptions and raised subsidies could drive demand, while public and foreign investment in insurance might arise from legislative reforms. Public-sector insurers are anticipated to receive capital infusions, and healthcare sectors could see growth from policy enhancements.

Expenditure focus remains on infrastructure sectors, including railways and roads, with additional funding for key housing and telecom initiatives. The PM Awas Yojana and telecom relief measures are notable initiatives, aiming to improve operational viability and housing finance.

(With inputs from agencies.)