Prof M K Bhat
In my previous article in this newspaper on 31st Jan. 2025 I had pointed out demand deficiency as a main reason for the slowdown in the current financial year and had suggested certain measures to increase the domestic consumption as geo political and economic situations are grim. The Government in its budget 2025-26 has tried to address the problem of demand deficiency by giving tax concession up to 12 lakh rupees and even tax slab was reshaped to increase the disposable income of people. The additional income is expected to increase the domestic demand and provide a boost to investment activities provided the additional income goes to consumption of goods. The multiplier effect will be evident when people resort to consumption rather than saving of the additional income. However, the concern for capex still remains as the construction of infrastructure has more multiplier effect than tax concession.It is true that economic decisions in democracies carry political ramifications too.
The Union Budget 2025-26 aims to bring “transformative reforms” in six domains namely Taxation, power, urban development, financial sector, mining and regulatory reforms, to activate the engines of economic growth for Viksit Bharat. The engines of growth as per budget are Agriculture, MSME, Investment and exports. It becomes imperative to analyse whether these four engines have the required steam to pull the economy to a higher level or not.In order to reach any conclusion, let use valuate the concerned engines and see whether the solution prescribed in the budget is appropriate or not.
Agriculture contributes 14% of India’s GDP and employs nearly 45.76% of the total work force while as number of people involved in agriculture in UK or USA is one to two percent. This clearly indicates the prevalence of disguised workforce in our agriculture sector.This workforce needs to be withdrawn from agriculture to escalate their productivity. This sector is also plagued by low productivity, post- harvest wastage, low irrigation, low quality of seeds and bad health of soil.Inorder to overcome these problems Prime Minister Dhan-Dhaanya Krishi Yojana was announced in the budget covering 100 districts to increase productivity.
In India 89.4% of the farmers own less than 2 hectares of land. Small and marginal farmers hold 92% of the total land holdings in the country. These marginal and small farmers remain wedded to agriculture for they have nothing else to do. The budget holds a comprehensive multi-sectoral programme to be launched in partnership with states to address under-employment in agriculture through skilling, investment, technology, and invigorating the rural economy
To enable the farmers to buy new seeds and fertilisers, the loan limit under the Modified Interest Subvention Scheme will be enhanced from Rs 3 lakh to Rs 5 lakh for loans taken through the KCC.It may not be out of context to mention here that loan is no solution to their problem. The low productivity disables them to repay the loan and the result is waving of loans at a later stage as per the convenience of the party in power.
It would have been prudent to train farmers for integrated farming as it can engage marginal farmers at their work place. They can better utilise their farms by cattle rearing,poultry,fish farming etc.The sub division and fragmentation of land has made the utilisation of science and technology almost impractical for marginal farmers, which comprises the biggest chunk of our farming community.The stress should have been on agro based industries which is almost missing in the budget.
MSME’s are the backbone of our economy with 5.93 crore registered units employing more than 25 crore people.It accounts for 45% of the total industrial production,40% of the total exports and manufacturing segment within MSME sector contributes 7.09 % of the GDP and MSME contributes 30.50% of the services The total contribution of MSME sector to the GDP is 37.54%. Exports from MSMES have seen substantial growth ,rising from Rs 3.95 lakh crore in 2020-21 to 12.39 lakh crore in 2024-25.The number of exporting MSMES has surged from 52849 in 2020-21 to 173350 in 2024-25
MSMEs’ have limited access to credit,face high interest rate,inadequate collateral,complex documentation and regulatory hurdles.Besides financial problems they lack skilled workers and marketing techniques .The union budget has come to the rescue of first time entrepreneurs by providing term-loans upto Rs 2 crore in the next 5 years to 5 lakh women, Scheduled Castes and Scheduled Tribes.Customized Credit Cards for micro enterprises with Rs 5 lakh limit for micro enterprises registered on Udyam portal, 10 lakh cards to be issued in the first year . A new Fund of Funds, for startups with expanded scope and a fresh contribution of Rs 10,000 crore to be set up. It would have been fruitful to simplify GST compliance, financial availability at low interest could have helped such units to grow.They also need marketing and other consultancy for which there is nothing in the budget.The revised classification expected to increase efficiency, technological adoption and employment generation will actually end with the benefitsto big units included after revision.The allocation for this sector carries little importance because actual expenditure over the last few years is on a decline.
Manufacturing sector currently contributes 16 -17 percent of the GDP and has placed India as the 5th largest manufacturing economy in the world with a contribution of 7.59% of the global GDP. It gives employment to over 12% of the country’s work force. It is worth to mention here that vibrant manufacturing requires a proper business environment to grow and to attain it, various steps were taken consecutively for new start-upsand established units since 2014. India stood at 142 number in ease of doing business in 2014and in 2019 it stood at 63 number.The economic survey has categorically mentioned for deregularisation to strengthen the domestic units.
The foreign direct investment has risen from $45bn in2014 -15 to$70.95 in 2023-24bn. This talks of Indias growing appeal as an international investment destination. In order to further attract the FDI the Budget has announced the increase of FDI sectoral cap for the insurance sector from 74% to 100%. India’s saving rate is 30.2% which is higher the global average of 28.2% and higher than many developed countries but the investment is low because of low rate of return from the investment.The return is low because of poor infrastructure,shortage of skilled labour and regulatory constraints.The budget has tried to equip our youth with the skills required for “Make for India, Make for the World” manufacturing by establishing Atal tinkering labs, 5 National Centres of Excellence for skilling to be set up with global expertise and partnerships. A Centre of Excellence in Artificial Intelligence for education to be set up with a total outlay of Rs 500 crore. An outlay of Rs 1.5 lakh crore proposed for the 50-year interest free loans to states for capital expenditure and incentives for reforms.The profitability enjoyed by firms is not getting reflected in employment or wage rate as per economic survey and the budget has not comeout with no instruction in this direction.
Exports get influenced by international geopolitical and economic situations.The slow economic growth rate along with Tariff war unleashed by USA,the disruption in supply chain due to war etc makes one to wait and watch for export growth.
The budget has touched the nerve but much will depend on the response from people and firms.
(The author is Professor (M.A.I.T) GobindSingh Indraprastha University, Delhi)
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