Dr Manish Kumar, Department of Economics, SRM University AP
The Union Budget 2025-26 lays the foundation for India’s economic transformation. In the emergent economic blueprint, the government is focused on growth, reforms and stability. For India’s economic transformation, the budget encompasses infrastructure development, consumption growth, digital expansion, investment promotion, innovation breakthrough, entrepreneurial drive, and social welfare. The commitment to fiscal discipline remains a cornerstone of the current government for eleven years. However, while the budget emphasizes critical areas necessary for economic progress, certain gaps remain in addressing long-term challenges such as private investment hesitancy, declining savings rates, lack of productivity growth and long-term energy security.
To drive economic growth, the budget focuses on consumption, investment, infrastructure, and reforms. The announcement towards the end of the budget speech of Finance Minister Sitharaman on income tax has become the biggest highlight of this budget. Tax rebate and exemption up to 12 lakh of annual income is straightaway directed to boost consumption amid slowing growth and inflationary expectations. As per various estimates, foregone tax collection of 1 lakh crore will translate into consumption and saving leading to 1-2% additional growth. There is immediate and widespread cheer for direct tax reforms and incentives.
A significant thrust of the budget is on infrastructure development, recognizing its role in reducing logistics costs and enhancing market efficiency. The government has allocated ₹11.21 lakh crore (3.1% of GDP) for capital expenditure in FY2025-26, underscoring its commitment to long-term asset creation. Investments in highways, dedicated freight corridors (DFCs), ports, and airports aim to integrate domestic and international markets, thereby boosting trade and industrial productivity. These efforts align with the overarching goal of transforming India’s logistical and transportation networks into globally competitive systems.
Parallel to physical infrastructure, the budget highlights social and digital infrastructure as drivers of growth. The current government has leveraged technology and digital connectivity to its advantage in delivering social welfare schemes and plugging massive leakage of resources. With the expansion of digital economy, job and employment opportunities have emerged across the urban India. The budget announces health and insurance schemes for 1 crore such gig workers under Ayushman Bharat – Pradhan Mantri Jan Arogya Yojana (PMJAY). Focus on urban amenities and infrastructure is in sync with rapid urbanization and aspirational demand for better living conditions.
The budget adopts a dual approach to economic management—stimulating supply-side growth through infrastructure and investment while addressing demand-side concerns through tax rebates and simplifications. By enhancing disposable income among lower and middle-income groups, the government aims to boost consumption, a key driver of economic growth. However, sustained demand requires deeper structural interventions, including employment generation and wage growth, to maintain long-term prosperity.
The realization of growth requires investment and productivity growth. The budget introduces various measures to attract investment, including tax incentives and regulatory simplifications. However, there is urgent need to address the decline in net investment rate amid increasing depreciation. Private investors continue to remain cautious, despite previous corporate tax reductions and indirect tax rationalization through the GST. The huge cash reserves of private sector must find ways to the market in conjunction with the RBI lowering interest rates and facilitating competitive lending. Additionally, a decline in foreign direct investment (FDI) inflows raises concerns about India’s ability to sustain its economic momentum.
One of the structural challenges facing India’s economic future is the declining savings rate. Elevated government spending, while necessary for infrastructure development and social welfare, risks crowding out private investment. Policy makers need to realize the limitations of infrastructure laden growth. To ensure sustainable growth, incentives such as income tax rebates would encourage household savings. However, the exact impact will emerge later, as there is a lack of consensus on the marginal propensity to save for the ₹4-12 lakh income group.
For sustained economic progress, India must strengthen its focus on research and development (R&D) and workforce skill enhancement. Historically, the country has lagged in innovation-driven growth, which has impeded productivity gains. The budget signals an intent to address these gaps and allocates ₹20000 crores for private sector driven innovation especially in deep tech and sunrise sectors. The overall budget of the department of science and technology (DST) has increased seven folds to ₹23290 crores. There are additional ₹2000 crore for national research foundation (NRF) and ₹2300 crore for biotech research. However, transformative results will require sustained efforts and private sector collaboration. Encouraging enterprises to invest in R&D, facilitating industry-academia partnerships, and expanding skill development programs will be critical for long-term competitiveness.
The budget focuses on reforms as a fuel for growth by announcing direct tax reforms along with financial sector reforms and regulatory reforms. For long-term sustainable growth, energy security is also a key component. India being a net energy importer remains a critical concern both for macroeconomic stability and strategic reasons. While the budget prioritizes green energy initiatives, a balanced transition is necessary to ensure energy security. Furthermore, current geoeconomic and geopolitical environment warrants to have long term perspective for the net energy security.
The Union Budget 2025-26 appears to present a liminal sketch of India’s economic vision transitioning towards developmental social market economy. The declining poverty and rising prosperity are outcomes of India moving forward on the path of growth and stability. The realization of India’s economic vision hinges on joint efforts of central and state governments and private participation.
