Budget 2025: Govt should boost capex by 10-15% to keep the economy humming

India has been the fastest growing large economy in the world since the covid pandemic. This period has been marked by policy stability and macro-fiscal discipline. The fiscal deficit is expected to drop to under 4.9% in FY25 and the quality of deficit has improved. While revenue expenditure was contained and rationalized by the Union government, capital spending grew 27% and 28% in FY23 and FY24. However, private capex has not happened at the pace that was expected and the high growth in government capex has driven the overall economic growth.

Looking ahead, the government will need to continue containing the fiscal deficit while also ensuring high GDP growth. Higher levels of capex, especially private capex, and attracting greater amounts of FDI could help accelerate growth.

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As the Union budget is formulated for the next fiscal, the ₹2.11 trillion one-time RBI dividend that the government received for FY25 may not be available. Despite this absence, the government should provide for a 10-15% increase in capex and also look at measures that can provide a boost to consumption. Such a scenario would require revenue augmentation measures.

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Divestments and asset monetization are revenue augmentation measures that can be considered. Over the last five years, government receipts from disinvestments have been less than ₹50,000 crore annually. In the current fiscal, till November, the receipts were ₹8,625 crore against the annual target of ₹50,000 crore. With the capital markets being buoyant, this may be a good time to start planning to tap the markets. In addition, disinvestment can provide a fillip for private investments.

The finance ministry has typically been conservative in the past two years while projecting gross tax revenue in the budget. The actual gross tax collections in FY23 and FY24 were higher by approximately ₹3 trillion and ₹1 trillion respectively, than the budget estimates for those years. A less conservative approach to tax revenue projections can help the government budget higher expenditure to drive growth. Some money can also be put in the hands of the people to boost consumption such as by giving tax relief to people earning up to ₹20 lakh annually.

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As mentioned earlier, higher capital spending, especially in manufacturing, can help accelerate growth. Manufacturing in India needs to be competitive vis-s-vis competing countries, especially China, which has generated an export surplus of nearly $1 trillion. Rationalizing tariffs and providing long-term stability in rates will provide confidence for large-scale and long-term investments. Tariff review has been on the government’s agenda and was committed to in the last budget. Further, taking cues from the current geo-economic trends, the government could also protect manufacturing investments in India through measures like anti-dumping duties. Finally, the government needs to continue pressing for reforms that will further improve ease of doing business and economic competitiveness. Simplification of laws and reducing disputes and litigations will also be welcome and helpful.

An area that will immensely help improve perceptions about ease of doing business in India would be measures towards dispute resolution. As on FY24, the total tax demand by Central Board of Direct Taxes stood at about ₹42.3 trillion, out of which 74%, i.e., ₹31.4 trillion is disputed. This amount is approximately 1.4 times the budgeted income tax revenues of ₹22 trillion for FY25.

Prioritizing disposal of cases involving high assessments, high tax demand and cases with favourable jurisdictional High Court ruling on the disputed issues should help. Capacity building for existing alternate dispute resolution mechanisms such as Advanced Pricing Agreements, review of safe harbour rules for rationalising the margins and threshold and bringing new mechanisms like mediation should also help.

The recent move to undertake a comprehensive review of the Income Tax Act provides an opportunity to address some of the concerns. It seems likely that the changes proposed in the tax law will be introduced as a separate bill soon. The government should share the draft amendments for public consultation and ideally provide an indication of areas likely to be picked up in line with the last Budget’s announcements on TDS and charities.

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Amidst geopolitical developments, India is uniquely positioned as the fastest-growing large economy with strong political capital. This budget will be watched for measures to enhance India’s growth, productivity and investment competitiveness.

Rajiv Memani is the chairman and CEO of EY India.