Macro

A Few ‘People’s Budget’

It is rather amusing that in today’s context, when the winds seem to be changing directions and there are talks of higher tariff walls and protectionist moves, the prescription remains the same – more deregulation.

Much of the discussion in the follow up to the economic survey and the Union budget has been around the tax reliefs for the middle classes. The effective beneficiaries of this relief is less than 2% of the country’s population. However, the air time given to this in the budget analyses in newsrooms has overshadowed certain other pertinent and pernicious ideas that were in the realm of deregulation.

In fact, finance minister Nirmala Sitharaman in her budget speech announced the setting up of a high-level regulatory reform committee that will share its recommendations in a year’s time towards promoting ‘ease of doing business’. This committee has been tasked to “unclog the regulatory cholesterol” particularly in laws pertaining to inspections and compliances.

There, of course, has been a concerted push towards “trust based governance” in successive budgets and subsequent easing of clearances over the recent years. Yet, it is imperative that we analyse both – the rather curious rationale, as well as the implications of what appears to be a concerted push towards further regulatory dilutions this year.

Deregulation refers to a policy-driven dilution of government regulation over key sectors, activities and procedures. Scaling down environmental protection criteria, striking off labour welfare measures, allowing private investment and ownership in sectors of public importance such as coal, are some of the instances of deregulation that the government uses, often in the name of boosting ‘growth’.

However, past experiences show that diluting government control has worked in favour of big business at the cost of labour, environment and more. It is for this reason one must track its push towards deregulation.

Shifting symptoms, yet same prescriptions

The economic survey provides the material and philosophical underpinnings of the urgent need for deregulation or what it calls “getting out of the way”. One of the rationale it harnesses is from the current geopolitical changes. It, in fact, correctly outlines the tectonic shifts that are unsettling many of the certainties of the earlier decades. Be it the Trump tariffs, the geo-economic fragmentations or the trade wars, it highlights that “the promise of shared benefits from a globalised world with open trade, free flow of capital and technology, and sanctity for rules of the game may be behind us”.

It outlines the implications of the same in terms of the anticipated fall in our global exports and also a shake-up in the foreign direct investments that had been aided over the decades by liberalised trade and globalisation. It also correctly identifies that in this changed geopolitical scenario “we need to intensify our efforts on the domestic front”.

However, the prescription it has on offer for this diagnosis seems to be the same as the one given thirty years back and for exactly the opposite symptoms.

It says that we need to look inward, that we need to unleash the potential of domestic-led growth. And for that we need deregulation. Thirty years back when the “winds of change” were blowing towards open markets and free trade, we were told that we must deregulate and ease rules for businesses to flourish, for foreign direct investments to find our shores habitable.

Also read: It’s Time to Re-Regulate, Not De-Regulate

Under the unambiguous motto of ‘ease of doing business’ the first two decades of the 21st century saw the World Bank champion the push to marketise and privatise key resources and areas such as water, education and health, and harness them for private profits and global capital. Anchored in the ‘ease of doing business index‘ jointly developed by the World Bank, this approach faced severe criticism for encouraging dilution of labour and key regulatory social and environmental safeguards, especially in ‘developing’ countries.

We were told that governments must step aside in the name of promoting business friendliness. So, hasn’t the government been “getting out of the way” for the last thirty years in any case? It is rather amusing that in today’s context, when the winds seem to be changing directions and there are talks of higher tariff walls and protectionist moves, the prescription remains the same – more deregulation.

That seems rather convenient.

Squeeze labour per unit of investment

The economic survey says that in the absence of export-driven growth and given the apprehensions about falling foreign direct investments, we need to concentrate more on the “efficiency” of investments. That is the only way, it says, of maintaining the levels of high GDP required to achieve the status of ‘Viksit Bharat’ by 2047.

How can efficiency be improved? “By reducing the time taken for investment to generate output and by generating more output per unit of investment,” it says.

That is what deregulation is expected to achieve by easing clearances and eroding compliances related to labour protection, workers’ well being and the environment. In other words, we need to attain the ‘Viksit Bharat’ status by following a growth path that squeezes labour.

In a cynical twist of logic, the survey argues how regulations meant for protecting workers in fact act against them and their supposed “long term” interests. As firms try to avoid such compliances, they tend to stay informal and avoid scaling up, it says. This, it says, in turn discourages job creation, limits wages and encourages informal employment. As a result, it advocates the removal of hard earned labour rights thereby in effect blurring the lines between the formal and the informal.

Also read: ‘Indians Spend a Third of Their Salary on Loan EMIs’: Report

In effect, it argues for giving up even the idea of decent jobs or labour welfare. As examples, it cites what it considers “unnecessary” rules like “double rate for overtime work”, like the provision of “rest-rooms or canteens” in factory premises, or even “safety measures mandated for women” working in night shifts.

Similarly, it says that our compliance and inspection based regulatory framework is not realistic and is better done away with. As an example it cites that only “644 working inspectors are available to oversee compliance in 3,21,578 factories, with each overseeing around 500 factories”.

However, while several labour rights activists may quote the same figures to argue for more inspectors, the economic survey argues in favour of doing away with such “unrealistic expectations”. Despite having the ambitions of a ‘Viksit Bharat’, it seems we don’t have the state capacities (it claims) to actually undertake such oversight over labour conditions.

In other words, our path towards a ‘Viksit Bharat’ needs to pass through sweat-shops and unregulated hours where the maximum can be squeezed per unit of investment.

A race to the bottom

The proposal to develop the Investment Friendliness Index as a marker of ‘competitive cooperative federalism’ further imagines states as competing markets and state governments as fund raisers.

The new Index is yet another addition to NITI Aayog-monitored indices such as Global Innovation Index, Indian Innovation Index and Export Preparedness Index. Offered as neutral performance indices, these measurements, as in the case of World Bank indices, promote real world governmental actions.

What this effectively means is that states are encouraged to compete in a race to the bottom as to who offers the worst deal for labour, health, environment and climate.

After all, none of these are novel ideas. We have witnessed the “efficiency” with which deregulation over the last three decades has eaten into the workers’ share and has fattened profits.

In the 1980s, the average share of Gross Value Added that went to workers’ wages was 24.7%, while the share that went to profits was 15.0%. By the 1990s, this had reversed, with wages declining to 15.9% and profits increasing to 24.2%.

Over the last decade, that is 2012-2023, the situation has worsened further, with wages stagnating at 13.0%, while profits have surged to 40.0%. This reflects a systematic decline in labour compensation as we have trampled upon workers’ rights in the name of ease of business.

Table 1. Percentage share of factor payments in GVA (nominal prices)

Principal characteristics of factories – All-India aggregates

Time Period	Wages	Other Worker Payments	Rent	Interest	Profits	Other Payments	GVA
1982-1992	24.7	13.8	1.3	23.3	15	21.9	100
1992-2002	15.9	11.5	2.1	22.9	24.2	23.3	100
2002-2012	10.7	11.0	1.6	11.5	45.5	19.7	100
2012-2023	13.0	15.0	0.9	12.4	40	18.7	100

Source: Annual Survey of Industries, various years, as reported by the Economic and Political Weekly Research Foundation (EPWRF).

Note: For the decades, the y-o-y average has been taken.

Share of factor payments in GVA

In whose name and for whom?

It is insidious that the economic survey shoots its deregulation agenda from the shoulders of the MSMEs. It argues that deregulation is “more critical for MSME growth than large enterprises”.

While large enterprises tend to find a way around compliances, it says that it is the smaller enterprises that are at the receiving end of compliance costs of regulations. However, that was the very precise criticism that was posed against the goods and services tax (GST) which the economic survey still celebrates as one of the government’s biggest achievements in terms of reform.

GST was a major shock that hit the unorganised sector the hardest and the worst sufferers were the MSMEs. A survey-based report released at the end of 2022 reveals that of the enterprises covered, 53% of the MSMEs reported a 10%-30% reduction in turnover, while 36% reported their turnover to have reduced by more than 30% after the implementation of the GST.

Among them, it is the micro-enterprises that reported the greatest losses.

Be it in terms of the dilutions in environmental clearances or the erosion of labour related compliances, it is always the bigger players and the corporates who will benefit the most from deregulation.

Likewise, it is India’s working masses at the bottom of the pyramid who would be at the receiving end in terms of lost rights and declining share in wages.

Also read: Unemployment and Price Rise Biggest Failures of the Modi Government: Survey

If the government really needed to boost the MSMEs, it could have done so by subsidising their capital input costs – machineries, equipment or loans, instead of diluting labour/environmental laws. If the government was really interested in boosting aggregate demand, it would have increased spending on quality public healthcare, education and social security, instead of tax reliefs to such a small segment.

It would have created decent jobs with livable wages instead of advocating for further deregulation.

Finally, even as the consensus on globalisation among its erstwhile champions in the West is under severe strain, it seems that the strategies evolved by the World Bank for penetration of global capital into the third world continue to be relevant in this changed scenario.

They are being deployed by India to create a more ‘friendly’ environment for private profiteers – mainly domestic businesses but also global ones. These are likely to benefit segments of favoured Indian industrialists.

Anirban Bhattacharya is a Consultant at the Centre for Financial Accountability (CFA). Amitanshu Verma works with the National Finance team at the CFA. Pranay Raj works as a Data Analyst at the CFA, New Delhi.

Why are Gujarati Migrants Fleeing the Model State?

The explanation is rather simple: the state has not been creating good jobs for years.

It has been in the news lately that Gujarati migrants make up a huge portion of those who have been deported by the Trump administration to India.

In fact, it is understood that Gujaratis are overrepresented among illegal Indian migrants in the US at large. In 2023, out of 67,391 Indian illegal migrants in the US, Gujaratis were 41,330.

The risks these migrants took were not small. In 2022, one Jagdish Patel, his wife and their two sons from the Dingucha village froze to death during a blizzard while attempting to cross the US-Canada border.

Illustration: Pariplab Chakraborty.

Gujaratis have been travelling to Africa and then, the West, for centuries, but not as illegal migrants. In the meantime, Gujarat has become a rich state – we are told that it is “a model” even. Then why are people leaving this way, and in such large numbers, the very Indian state which has one of the highest growth rates and the highest per capita net state domestic products – Rs 181,963 rupees in 2022-23, which was more than double the national average of Rs 99,404?

The explanation is rather simple: there are very rich people in Gujarat, but many more very poor people, because the state has not been creating good jobs for years.

The persistence of mass poverty

Not only did the growth rate of jobs not increase in proportion to the growth rate of the state GDP, but the quality of jobs did not improve either, as is evident from the informalisation process at work in the job market.

In 2022, according to the Periodic Labor Force Survey, 74% of the Gujarati workers had no written contract, against 41% in Karnataka, 53% in Tamil Nadu and Kerala, 57% in Madhya Pradesh, 64% in Haryana, 65% in Maharashtra and 68% in Bihar.

More importantly, this ‘casualisation of the workforce’ resulted in low wages. In April-June 2024, the average wage earnings per day from casual labour work for Gujarat was Rs 375, less than the national average, Rs. 433 and much less than in Kerala (Rs. 836), Tamil Nadu (Rs. 584), Haryana (Rs. 486), Punjab (Rs. 449), Karnataka (Rs. 447), Rajasthan (Rs. 442), Uttar Pradesh (Rs. 432) and even Bihar (Rs. 426). The only state where wages for the casual labour force lagged behind Gujarat was Chhattisgarh (Rs. 295).

Even average monthly earnings from regular salaried employment were much lower in Gujarat than elsewhere. In April-June 2024 it was Rs. 17,503, against Rs 21,103 as an average in India. Among the big states, only Punjab (Rs 16,161) lagged behind Gujarat. Karnataka (at Rs. 25,621), Haryana (at Rs. 25,015), Maharashtra (at Rs. 23,723), Kerala (at Rs. 22,287), Andhra Pradesh (at Rs. 21,459), Tamil Nadu (at Rs. 21,266), Uttar Pradesh (at Rs. 19,203), Rajasthan (at Rs. 19,105), Madhya Pradesh (at Rs. 18,918) and West Bengal (at Rs. 17,559) were all doing better.

Of course, those who migrated to the US are unlikely to have been salaried people. They most probably came from the villages of Gujarat where the condition of poor peasants is particularly bad.

In 2023, the average daily wage for agricultural workers, at Rs 242, was the lowest in India, and far behind that in Bihar, one of India’s poorest states. The daily wage for rural people not working in the fields (but as artisans, for example), at Rs 273, placed this state second-last, just ahead of Madhya Pradesh (Rs. 246) – and still far behind that of Bihar (Rs. 313). The daily wage for construction workers, at Rs 323, ranked Gujarat third to last, before Madhya Pradesh (Rs. 278) and Tripura (Rs. 286).

Wages are not the only indicators one must pay attention to for measuring poverty. The Monthly Per Capita Expenditures (MPCE) of the state’s rural and urban dwellers are very revealing too. According to the National Sample Survey Office, in 2022-23, Gujarat’s MPCE was at Rs. 6,621 in urban areas and Rs 3,798 in rural areas, far from what it was in Tamil Nadu (Rs 7,630 and Rs 5,310), Kerala (Rs. 7,078 and 5,924), Karnataka (Rs 7,666 and Rs. 4,397), Andhra Pradesh (Rs. 6,782 and Rs. 4,870) and even Haryana (Rs 7,911 and 4,859) as well as Maharashtra (Rs. 6,657 and Rs 4,010).

The Multidimensional Poverty Index (MPI), developed by the UN to measure poverty by taking into account not only standard of living, but also access to education and healthcare, is very useful here, as it goes beyond economic criteria. Gujarat, from this point of view, is in the middle of the table, with 11.66% poor in 2020-21, barely less than West Bengal (11.89 %), but more than Maharashtra, Karnataka, Haryana, Andhra Pradesh, Telangana, Himachal Pradesh, Punjab, Tamil Nadu, Jammu and Kashmir and Kerala (to mention only large states). Gujarat is particularly penalised by its poor score in terms of access to food: 38% of the state’s inhabitants reportedly do not have access to the food they need (compared with 42% in Bihar and 40% in Jharkhand – the other two states occupying the lowest ranks here).

How can we explain the absence of good jobs in the Indian state with the largest per capita net state capital product – and the correlative persistence of mass poverty that forces so many people to migrate to the West?

Few good jobs: a capital intensive, oligarchic political economy

The explanation of this paradoxical situation lies in the trajectory Gujarat started to follow under Narendra Modi. Between 2001 and 2014, the government gave priority to infrastructure projects (including ports, thermal plants and refineries) and petrochemicals industry at the expense, not only of social expenditures – including health and education – but also more labour-intensive activities.

This strategy contrasted with the kind of political economy Gujarat was known for till then. Indeed, the state has traditionally been a land of entrepreneurs where the state has assisted small and medium enterprises (SMEs) and where some positive discrimination was implemented for smaller-scale entrepreneurs. In the 1990s, the industrial policy of the state government of Gujarat still focused on SMEs which are four times more labour-intensive than big enterprises on average.

The 2003 industrial policy introduced by Narendra Modi broke away from this tradition, and the 2009 one even more. Small was not beautiful any more. The Gujarat Special Investment Region Act was passed in order ‘to come up with a legal framework to enable development of mega investment regions and industrial areas in the State’. Its ultimate aim was to create ‘global hubs of economic activity supported by world class infrastructure’. The Act was the mainstay of the 2009 Industrial Policy, which was explicitly designed for ‘making Gujarat the most attractive investment destination not only in India but also in the world’. It targeted not only ‘prestigious units’ (above Rs 3 billion, or $37.5 million), but ‘mega projects’, which denoted more than Rs 10 billion ($125 million) of project investment and direct employment of only 2,000 people – creating a ratio of Rs. 500,000 ($6,250) per job, a clear sign of capital intensity. To attract big companies, access to land was considered a key element in 2009. The Gujarat Industrial Development Corporation (GIDC) therefore started to acquire land to sell to industrialists, in some cases on a 99-year lease, or in Special Economic Zones.

The new industrial policy not only impacted the peasantry because of its provisions regarding land, it also affected the workforce. While, till the 1990s, it was mandatory for businesses benefiting from state subsidies or incentives in the context of some new investment to employ 100 permanent workers, ‘the condition of employing 100 permanent workers turned into 100 regular workers and then just 100 workers’ in the 2000s.

The new industrial policy of Gujarat benefited a handful of regional or national oligarchs whose firms were all highly capitalistic and not at all labour intensive. As a result, between 2009-10 and 2012-13, Gujarat was the state where investment in industry was the highest in India (above Maharashtra and Tamil Nadu). But this performance did not translate into job creation as much as in the states where enterprises tended to be smaller and (therefore) more labour-intensive. A comparison between Gujarat and Tamil Nadu is illuminating in this respect: in 2013, the Gujarat industrial sector represented 17.7% of India’s fixed capital and only 9.8% of factory jobs, whereas the industry of Tamil Nadu represented 9.8% of fixed capital but 16% of factory jobs.

It is not just that the big companies invested in activities which were not labour intensive, but they also contributed to the decline of the Gujarati SMEs which took part in their supply chain (big companies usually did not pay them on time) and which had to buy key components of their activities from them. Energy oligopolies, like the Adani Group, sold them electricity at a very high price, for instance. Between 2004 and 2014, 60,000 MSMEs shut down in Gujarat.

Incidentally, the Adani group, whose head, Gautam Adani epitomises today’s crony capitalism, with a total headcount of just 36,000, employs the fewest number of workers among the top six groups in India, which have at least 150,000 employees each.

Christophe Jaffrelot is research director at CERI-Sciences Po/CNRS, Professor of Politics and Sociology at King’s College London and Non-Resident Fellow at the Carnegie Endowment for International Peace. His publications include Modi’s India: Hindu Nationalism and the Rise of Ethnic Democracy, Princeton University Press, 2021, and Gujarat under Modi: Laboratory of Today’s India, Hurst, 2024, both of which are published in India by Westland.

Data Story: The Unseen Costs of Underfunding Education and Healthcare

No nation has ever achieved sustained prosperity without first ensuring that its people are healthy, skilled, and empowered.

This article is from a two-part series analysing the budget numbers and their sectoral allocations for FY 25-26.

Beyond mainstream news headlines, a closer look at the budgetary numbers offers critical insights. India’s defence budget has more than doubled in the last decade alone, surpassing Rs 6.8 lakh crore in the recently announced budget.

Yet, despite this staggering figure, the armed forces remain far from satisfied. Purchased weapons arrive late, critical modernisation projects have dragged on for years, and nearly a quarter of the budget is swallowed by pensions. Even with record-high spending, the military still lacks the firepower it desperately seeks.

All this comes at a cost of critical sectors like education and healthcare which continues to be sidelined.

Schools across the country remain underfunded, with many lacking even basic infrastructure. The crisis is so severe that the suicide rate among students has now surpassed that of farmers, a grim reflection of the pressure and neglect in the education sector. Healthcare paints an equally dire picture where India is short by a staggering 2.4 million hospital beds, leaving millions without access to proper medical treatment.

While India races to strengthen its borders, it seems to be overlooking its most valuable asset which is its people.

India’s education crisis: A system in need of urgent reform

Education has long been touted as the foundation of India’s future, yet budgetary allocations and systemic inefficiencies tell a different story. Public expenditure on education remains around 2.9% of GDP (2024), far below the 6% target recommended by the Kothari commission. While funding has increased since 2015-16, the sector continues to grapple with severe infrastructure and manpower shortages

One of the most pressing concerns is the acute shortage of qualified teachers. Over 1.2 million teachers vacancies exist nationwide, leading to overcrowded classrooms with student-teacher ratios exceeding 50:1 in many government schools. Worse, nearly 40% of government-appointed teachers lack proper qualifications, severely impacting learning outcomes. In rural areas, these issues are compounded by poor infrastructure, outdated curricula, and the digital divide which seriously hampers quality of education for millions.

Also read: Despite the ‘Investing in People’ Rhetoric, Budget 2025 Does Little for the Social Sector

The cracks in the system manifest in tragic ways. India has one of the highest youth suicide rates in the world, with one student taking their own life every 42 minutes in 2020. The numbers paint a grim picture – 11,396 student suicides were recorded that year, most attributed to academic pressure, parental expectations, and anxiety. Yet, mental health support in schools remains largely absent.

While government with the recent budget did try to boost initiatives such as Atal Tinkering Labs and digital connectivity programmes, these attempt to modernise education and their impact is limited when the fundamental issue of lack of investment, inadequate teacher training, and mental health neglect continues to remain unaddressed.

The disparity in budget allocation does make one thing clear, how education simply isn’t a priority for this government. Year after year, defence spending sees steady increase, while education remains on the back burner. The graph below reflects this stark reality:

Education and defence spending in budget 2025-26

Source: Budget 2025-26

Additionally, when we examine India’s defence budget closely, we see how it has witnessed a staggering 152% increase over the past decade, rising from Rs 2.46 lakh crore in 2015-16 to Rs 6.8 lakh crore in 2025-26. This sharp escalation reflects India’s evolving security concerns, modernisation efforts, and the financial strain of a massive standing army.

A closer breakdown of the numbers, however, highlights the structural challenges within this surge. In 2020-21, out of Rs 3.37 lakh crore allocated for defence, nearly Rs 1.34 lakh crore (29%) was earmarked for pensions. This means that a significant chunk of the budget is not directly contributing to modernisation, procurement, or infrastructure.

Healthcare hasn’t been left too unaffected from this trend. When looked at first glance, India’s healthcare budget appears to be improving and although it’s partially true the allocation has increased from Rs 33,152 crore in 2015-16 to Rs 95,957 crore in 2025-26, showing a more than 100% jump but dig deeper, and the picture is far less reassuring.

Despite this increase, India’s hospital bed availability remains critically low, with just 1.4 beds per 1,000 people, far below the WHO recommendation of 3.5 per 1,000. Worse, government hospitals have an even more alarming ratio – only 0.79 beds per 1,000, meaning the country is short by 2.4 million beds. The doctor-to-patient ratio stands at 1:1,511, again failing to meet the WHO-recommended 1:1,000.

The rural-urban divide further exposes the cracks in the system; 70% of Indians live in rural areas, yet only 40% of hospital beds are available to them. Nurse-to-patient ratios stand at 1:670, a glaring shortfall from the recommended 1:300. Public hospitals are overwhelmed, underfunded, and stretched beyond their limits, while private hospitals, though better equipped, remain out of reach for millions due to high costs.

The graph bellow tells us a troubling story, not only is the healthcare sector underfunded, but the government doesn’t even fully utilise what it allocates. As seen in the graph, actual expenditure often falls short of budget estimates, highlighting deep structural gaps within the system. Whether due to bureaucratic inefficiencies, delays in project execution, or lack of long-term planning, the unspent funds reflect a widening disconnect between policy and implementation. Allocating money on paper means little if it fails to translate into real improvements. This consistent underutilisation raises a serious question.

Source : CDPP

Perhaps the most devastating statistic is this: 62.6% of India’s total healthcare expenditure is paid out-of-pocket by individuals, making it one of the highest in the world. Medical bills are a leading cause of poverty in India, yet the government has done little to reduce this burden.

While the defence budget enjoys a steady rise, with Rs 1.80 lakh crore allocated for capital outlay alone in 2025-26, healthcare remains chronically underfunded. Modernisation in the military is deemed necessary, but what about the modernisation of hospitals? Where is the urgency in building new medical infrastructure?

The key to a stronger and prosperous India

If we truly want to escape the traps that loom over our future, from the middle-income trap to the risk of premature deindustrialisation or even from jobless growth to what economist Arvind Subramanian calls the danger of becoming a “stalling economy” we must recognise that national power isn’t just measured in defence budgets and GDP figures. It is measured in the capabilities of its people.

Also read: Health Budget: How Closer Scrutiny of Major Announcements Reveals Half-Baked Truths

With a young population, we have a fleeting window to reap the benefits of a demographic dividend, but without robust investments in education and healthcare, that advantage could easily turn into a demographic disaster. A McKinsey report warns that India risks “growing old before it grows rich,” as inadequate human capital investments could stall economic progress before the country fully develops.

No nation has ever achieved sustained prosperity without first ensuring that its people are healthy, skilled, and empowered. We can continue funnelling resources into military expansion while neglecting the very foundation that sustains national strength, or we can recognise that a truly secure India is one where every child has access to quality education, where no family fears medical bankruptcy, and where human potential, not just military power, defines our progress.

Anania Singhal also contributed to this article’s research.

Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, and Director, Centre for New Economics Studies. He is a Visiting Professor at London School of Economics and an Academic Visiting Fellow to AMES, University of Oxford.

Ankur Singh is a Research Assistant with Centre for New Economics Studies (CNES) and a team member of its InfoSphere initiative.

The Macro Direction of the Budget Can’t Be Camouflaged by Making a Section Happy

If a budget is to resolve any problem, it needs to put the money where the mouth is. This budget fails in this regard.

There were high hopes from the just-presented Union budget 2025-26, given the challenges facing the economy. There have been consistent signs of a slowdown in the economy, rising unemployment and persisting high inflation.

These three macroeconomic features are interlinked. Unemployment and inflation together impact demand in the economy, and lead to slowdown in growth and rising inequality.

External challenges not in our control

The challenge before the economy is not only from within, but critically, from without. US President Donald Trump is out to “make America great again”. For this he is bullying nations, especially India, which he has called the “tariff king”. He is threatening to impose high tariffs on Indian exports as well as exports from China and even his closest allies. There is likelihood of a tariff war, supply disruptions and inflation kicking up globally.

With such uncertainty, the rupee has been declining compared to the dollar, foreign funds are flowing out leading to a decline in the stock markets, and foreign exchange reserves are falling. These will add to inflationary pressures in India.

Since this external environment is not in our control, we need to strengthen ourselves internally. The Economic Survey released a day before the budget echoes this thought.

Usually, there is a difference between announcements in the budget and analysis in the Economic Survey. This year is no different.

Budget proposals

The budget speech seemingly addresses the internal concerns by showing intent to tackle them. At the very outset, it presents its thrust: “accelerate growth, secure inclusive development, invigorate private sector investments, uplift household sentiments and enhance spending power of India’s rising middle class”.

Next it announces six things that ‘viksit Bharat’ needs. These cover education, health, ending poverty, etc.

If the message was not loud and clear, it announced ten broad areas “focusing on Garib, Youth, Annadata and Nari”. If one was still being sceptical and naive, it announced a focus on the “powerful engines: Agriculture, MSME [micro, small and medium enterprises], Investment and Exports” and so on.

Also read: No More a Modi Sarkar: 2025 Budget, Like Last Year’s, Bears Strong Imprint of Coalition Government

If one was not yet overwhelmed, in the next para, it said, “it aims to initiate transformative reforms across six domains”.

Clearly, this was the political thrust from the finance minister (FM) – announcing something for all sections of society.

Of course, the FM began with announcements for agriculture and MSMEs – representing the two biggest sections of the population and also the two most marginalised sections. If their incomes rise, the demand problem would be substantially taken care of, and so would growth and poverty.

Allocations

If a budget is to resolve any problem, it not only has to have announcements but also back them with substantial allocations – put the money where the mouth is. The budget fails in this regard.

Compared to 2023-24, expenditures in 2024-25 are short for agriculture and allied activities, education, rural development and urban development. So, in real terms, these allocations are substantially less than last year, and this happened last year (in 2023-24) also. There is no guarantee that this will not repeat, because who remembers the previous budget?

So, announcements may not be backed by expenditures and the goals so loftily announced may not be fulfilled.

But this is required by politics. Budgets typically announce grand schemes with fanfare, but their targets go unfulfilled. Take the PM Awas Yojana-Urban for housing. In 2023-24, Rs 21,684 crore was spent. Next year, in 2024-25, it was allotted Rs 30,171 crore – a 39% increase, making the budget look good. But only Rs 13,670 crore was spent.

Now the allocation for 2025-26 is Rs 19,794 crore, even less than what was spent in 2023-24. The Swachh Bharat Mission-Urban tells a similar story.

The Jal Jeevan Mission is a complete disaster – as if the nation has sorted out its drinking water problem. In 2023-24, Rs 69,992 crore was spent, and for 2024-25 Rs 70,163 crore was allotted. But the expenditure was Rs 22,694 crore – only 32% of the allocation.

Now, for 2025-26, Rs 67,000 crore is allocated, which is less than what was spent two years back.

It seems the greater the problem, the smaller the allocation.

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is also down in real terms, since the allocation has not been raised. This is the most employment-intensive scheme and needed to be boosted since rural unemployment has been quite high post-pandemic.

In other words, all the schemes that cater to employment generation, like those related to education, health, rural development and agriculture as well as MGNREGS have faced cuts in real and at times even nominal terms.

If so, how does the FM plan to deal with the basic problems of demand and growth of the economy?

Focus

The FM is following supply-side policies, granting concessions to the well-off and the corporate sectors. The big income tax relief announced is ostensibly for boosting demand from the middle class.

But as has been repeatedly stated by this author, this tax cut will benefit not more than three crore individuals.

According to the FM, the tax foregone due to concessions in direct taxes will be about Rs 1 lakh crore. This will surely benefit the organised sector.

This tax foregone coupled with lower fiscal deficit will mean less expenditures elsewhere as depicted in the previous section on allocations. So, the gain in demand from the well-off would be overwhelmed by the decline in demand in the unorganised sector. After all, the well-off save while the poor spend almost everything.

So, a shift in incomes from the poor to the well-off (tax payers) would lead to the lowering of demand.

The government has to realise that the demand problem cannot be taken care of by supply-side responses. Unfortunately, the government’s inclination is to give concessions to big businesses. This was also evident during COVID times in the Atmanirbhar Bharat package.

Such a misconception of the country’s internal problems will only aggravate them. So, our ability to handle external challenges posed by the US and the rapid rise of AI will be further degraded.

In brief, one needs to question the macro direction of the budget. It cannot be camouflaged by making the well-off sections, who are the opinion-makers, happy through income tax cuts.

Arun Kumar is author of Indian Economy Since Independence: Persisting Colonial Disruption.

For Farmers, Women, the Poor and the Youth, Budget 2025-26 Offers Only Symbolic Changes

The government continues its big-ticket capital expenditure spree, pouring money into infrastructure while social spending remains a fraction of its overall expenditure.

A lot was being expected from the Union government and the finance minister in their first full year budget in the third term.

This was broadly because there was hope that a roadmap would be proposed for structural change and boosting growth, through consumption and private investment – which has been all weakening over the last eight years, particularly since the demonetisation days of 2016.

The offered fiscal vision in this budget fails in addressing that.

With public debt at nearly 80% of GDP and interest payments eating up a quarter of government revenue, the government stuck to a fiscally cautious script. This is a fiscally tight budget, with an aiming of hitting a fiscal deficit target of below 4.5% by 2026-27. No surprises there – since the finance minister has stuck to the old tune of keeping to fiscal consolidation targets. This time though, it comes at the cost of boosting growth.

In remaining fiscally conservative, the budget missed the opportunity to make bold bets for the short term while delving too much either into the past or the future. Agriculture sector simply got a headline push, with the Prime Minister Dhan-Dhaanya Krishi Yojana targeting 100 underperforming districts.

Taxpayers saw some relief, with those earning up to Rs 12 lakh now exempt from income tax under the new tax regime. Note that the Rs 12-lakh limit is not an exempt limit but simply a rebate, requiring all to file income tax regardless of how much they earn. A person earning even one rupee over the Rs 12 lakh rebate would be required to pay the complete tax levied on other lower slabs as well. There isn’t much for the higher upper-middle income group, who, combining all surcharge, would still have an effective tax rate of roughly 39% on earning more than Rs 30 lakhs per annum.

Moreover, any multiplier effect of a marginally higher disposable income for less than 30-31 million of the overall workforce is a drop in the bucket. Its macro-growth impact may hardly be realised in any noticeable margins and despite much brouhaha in the mainstream media, the “middle class tax break” further depends on where any disposable income is saved.

As per the Economic Survey, if 77% of those receiving direct transfers are spending 44% of that on food and more than 31% on loan repayments and essential services, the actual growth dividend of this “saving” from changed tax slabs (with effective rates almost the same) will be very limited, combined with a higher inflationary tax and GST-imposed burden which has been gripping the liquidity landscape for middle-income groups.

On trade policy and combating excessive government regulation on trade, the government offered a rationalisation of the custom duties and import restrictions, with tariff cuts announced on products like synthetic flavours, solar panels, and certain vehicles. These hint at external pressures. These steps are very well being viewed as a move to appease global partners before the prime minister’s upcoming state visits, especially to the US.

We also need to closely assess whether the Union government has genuinely addressed the needs of marginalised communities, particularly the poor, youth, farmers, and women, who were central to the ruling Bharatiya Janata Party’s electoral messaging.

The short answer to this is: to a very limited, marginal extent.

Overall, nothing substantive comes out of the budget for these respective communities who have been reduced to electorally critical groups for a government which is known for using the Budget as a medium to appeal to voters for upcoming state and union elections. This budget’s overt focus on Bihar remains a case in point.

In appearing to sound comprehensive, the 2025-26 budget speech also outlined 10 key areas to drive these objectives, including enhancing agriculture, MSMEs, employment, and innovation. The budget claims to empower the poor, youth, farmers, and women while promoting balanced regional growth. But it does not deliver on this.

This government celebrates a dip in urban unemployment to 6.4%, but – let’s be honest – this is barely movement from 6.6% in the last quarter. More troubling is the kind of jobs being created, as economists like Arvind Subramanian have recently pointed out.

Most of the new employment is in low-wage and informal sectors which offers little security or upward mobility. The economy needs 78.5 lakh new non-farm jobs every year to keep up with the workforce, yet there’s no clear roadmap to get there.

MSMEs which are undisputed backbone of employment with over 23.24 crore workers should be thriving. Instead, they are drowning in delayed payments and credit shortages. Despite all the talk of supporting small businesses, fundamental issues remain unsolved.

The government’s focus on gig work and entrepreneurship as employment solutions by giving them health insurance and ID cards, though important, feels more like a way to dodge real labour market reform than a serious job creation strategy.

Source: Union Budget 2025-2026.

Empowering the poor: Credit and livelihoods

A key highlight of the budget is the expanded credit access in form of guarantees for the micro and small enterprises (MSMEs). The government has increased the credit guarantee cover from Rs 5 crore to Rs 10 crore, unlocking an additional Rs 1.5 lakh crore in credit over the next five years. This move is expected to empower small businesses, promoting entrepreneurship and job creation at the grassroots level.

Another development is the introduction of customised credit cards with a Rs 5-lakh limit for micro-enterprises registered on the Udyam portal, which, only if effectively implemented, could significantly enhance financial inclusion for small entrepreneurs who often face challenges in accessing formal credit.

Additionally, the extension of the PM Garib Kalyan Anna Yojana may help ensure the continued provision of free food grains to over 80 crore people for another five years. The budget seeks to also allocate financial assistance for education, offering loans up to Rs 10 lakh with interest subvention for students from low-income families. The actual disbursement process of funds for these and the implementation timeline of this remains a big question, as seen for other rural and low-income welfare schemes too.

On agriculture: Do farmers benefit?

The budget falls short of addressing the need for higher Minimum Support Prices (MSP) and additional procurement mechanisms, which are crucial for ensuring farmers’ income security.

The government’s broader strategy focuses on enhancing agricultural productivity through advanced farming techniques, fostering sustainable practices, and expanding irrigation infrastructure to reduce crop wastage and increase output.

It introduced the Pradhan Mantri Dhan Dhanya Krishi Yojana, aimed at boosting productivity, promoting crop diversification, and enhancing post-harvest storage at the panchayat and block levels. The programme shall target 100 districts with low agricultural productivity, aiming to improve infrastructure and provide better access to resources in struggling regions. While these efforts reflect a long-term vision for agricultural sustainability, concerns persist regarding immediate financial relief for farmers.

Moreover, facilitating access to both long-term and short-term credit for farmers is a key component to ensure their financial well-being. The rural prosperity initiative is also introduced to further support these efforts, aiming to uplift rural communities and stimulate overall agricultural development.

Women: Access to credit versus systemic barriers

A significant announcement is the Rs 2 crore term loan scheme for five lakh first-time entrepreneurs who are women, or from the Scheduled Castes or Scheduled Tribes. This initiative aligns with efforts to bridge gender or societal disparities in financial access. According to an IFC report (2022), 90% of female entrepreneurs in India have never borrowed from formal financial institutions, highlighting the need for such targeted interventions.

Additionally, the expansion of Saksham Anganwadi and Poshan 2.0 to cover eight crore children, one crore pregnant mothers, and 20 lakh adolescent girls reflects a marginally targeted approach to improving women’s and children’s health. By ensuring sustained nutritional support, particularly for lactating mothers and adolescent girls, this initiative has the potential to drive long-term improvements in community health outcomes. This comes at a time when India performs at the worst possible level on various nutritional access pillars and indices.

While increasing access to agri-credit is a positive step, addressing systemic barriers within the announced and existing schemes, and on issues such as workplace inclusion, safety, and labour force participation remains crucial. India’s ranking in the Global Gender Gap Index suggests that economic empowerment for women requires a multifaceted approach beyond just financial support.

Social sector spending

The government talks a big game on social welfare – education, healthcare, rural development – but does the budget back it up?

On paper, social sector spending has increased, but when measured against inflation, population growth, and the actual needs of citizens, the numbers start to look less generous.

Total net receipts for the centre are estimated at Rs 28.37 lakh crore, while total expenditure stands at Rs 50.65 lakh crore, signalling continued fiscal constraints. The government may boast about keeping the fiscal deficit at 4.4% of GDP, but at what cost? When interest payments alone swallow nearly a quarter of total revenue, what’s left for genuine welfare spending?

Take education – an area where India desperately needs improvement. The budget allocations suggest a push, but in real terms, funding struggles to keep pace with rising student numbers and the infrastructure deficit in government schools.

Healthcare tells a similar story: expanding medical education and cancer care centres are welcome moves, but public health funding as a percentage of GDP remains abysmally low. Rural development programmes see a modest uptick, yet high unemployment and rural distress raise questions about whether these schemes are enough to move the needle.

Meanwhile, the government continues its big-ticket capital expenditure spree, pouring money into infrastructure while social spending remains a fraction of its overall expenditure. The balance between long-term economic growth and immediate welfare needs is crucial – but is this government tilting too far toward optics-driven mega-projects while leaving social security an afterthought?

It would appear so – reflecting a confused and politically motivated economic ideology that lacks a clear vision for securing growth and development for all.

Chart: MGNREGS Allocation Stagnates at Rs 86,000 Crore

The rural employment guarantee scheme found no mention in Nirmala Sitharaman’s budget speech, which largely focused away from the social sector.

New Delhi: For the second consecutive budget speech, Union finance minister Nirmala Sitharaman has skipped mention of the Mahatma Gandhi National Rural Employment Guarantee Scheme – the world’s largest job guarantee programme and a consistent source of income for the rural unemployed.

The Narendra Modi government has allocated Rs 86,000 crore to the scheme – the same amount as what was spent on the scheme as per the Revised Estimate of 2024-2025. Rs 86,000 crore is also the exact amount that was promised in the Union Budget of 2024-25, presented in July, 2024, after the National Democratic Government came to power.

Rs 86,000 crore is less than what was spent on the scheme – which is a right under the MGNREGA – in 2023-24, Rs 89,154 crore.

In a pre-budget video for The Wire, social activist Anuradha Talwar had said that the challenges facing the MGNREGS, from digital exclusion to budget cuts, have left workers unpaid. “MGNREGA is essential for the economy, and the government shouldn’t use it in opportunistic ways,” she had said.

The United Progressive Alliance-era scheme has often been the site of the Modi government’s drive to play down rural distress. However, it has played a major role in the post-COVID crisis of jobs. Reports have noted how demand for work under the rural jobs programme fell in 2023-24, compared to the peak of COVID, but was still 15% more than the average demand between 2014-15 and 2018-19.

The 2023-24 Lok Sabha Standing Committee’s February 2024 report on Rural Employment through the MGNREGA said that the reduction to the scheme in budgetary allocation in 2023-24 was “puzzling and needs to be looked into”.

In 2015, Modi had called MGNREGS a “living monument to the opposition’s failures.”

Budget 2025-26 | ‘No Income Tax’ Slab Raised to Rs 12 Lakhs Per Annum, Poll-Bound Bihar in Focus

A day ago, the government presented the Economic Survey of the past year, which claimed that growth in FY26 would be between 6.3 and 6.8%.

The Union finance ministry has tabled the budget for 2025-2026. This is finance minister Nirmala Sitharaman’s eighth budget speech. Amidst inflation and a worsening economy, many are looking to this budget for news on tax cuts. A day ago, the government presented the Economic Survey of the past year, which claimed that growth in FY26 would be between 6.3 and 6.8%.

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Budget 2025: The What, Why and How of Boosting Consumption for Stimulating Growth

The Union finance minister is expected to introduce policy measures like increasing tax exemptions.

The Budget deals with allocating money towards areas where the government thinks it is essential to spend, and finding out ways such as taxes, to finance it. The government primarily requires money to spend on social infrastructure (such as schools, hospitals, water, sanitation, etc.), physical infrastructure (such as railways, roads, airports, etc.) and transferring funds to the poor and the deprived, so that distribution of income becomes more equal. But, how does one say whether a budget is good or bad? The general assumptions underlying a good budget are: it contains the fiscal deficit, carries on with the necessary reforms, and give incentives to consumers and business.

For the benefit of the reader, there are five components of demand, namely, consumption expenditure, investment expenditure, government expenditure, exports, and imports. The most important component of demand is consumption expenditure, explaining around 57% of the national income. Generating and sustaining income would therefore call for strategies that would generate income and thereby sustain consumption.

Source: Indian Economic Survey, 2024.

Until the middle of 2024, the Indian economic outlook looks quite optimistic, with predictions of continued growth at a rate of over 7%. However, when India posted a lower growth rate of GDP – 5.4% in the second quarter of 2024, the economic outlook quickly turned pessimistic. According to the government’s own estimate, GDP growth is expected to hit a four-year low at 6.4%. Other metrics of economic growth are also disappointing, with declining urban and rural consumption, single-digit growth in GST collections (7.3% year-over-year in December 2024), and core infrastructure growth (4.3% year-over-year increase during November 2024).

There has been a fall in car, two-wheeler, and cement production. In fact, the PMI (Purchasing Managers’ Index), which tracks sales, employment, inventories, and price data of manufacturing sector companies, has shown a sharp decline to 56.4 – the lowest in 12 months.

Therefore, the Union finance minister is expected to introduce policy measures aimed at boosting consumption, such as increasing tax exemptions. Additionally, efforts should be made to create a more favourable business environment by reducing the cost of doing business, for instance, through increased fund allocation for physical infrastructure and implementing necessary reforms to eliminate the long-standing inverted duty structure (IDS).

This will help to alleviate the consumption distress among the middle class (with an annual income between Rs 5 lakhs and 30 lakhs) and lower income households (with an annual income between Rs 2 lakhs and 5 lakhs) which form the backbone of India’s growth story. The majority of these groups are employed in the agricultural sector, self-owned businesses, and the MSME sector. Together, they make up 70% of India’s working population with 400 million stuck in low productive agriculture sector and around 250 million in the MSME sector.

The agriculture sector has struggled to flourish, with 82% of farmers classified as smallholders, owning less than 1.15 hectares of land. Moreover, these land parcels are often not contiguous, making the mechanisation of agriculture difficult and contributing to low agricultural income. India’s labor productivity – economic output per hour of work – is just 12% of the US levels. In purchasing parity terms, GDP per hour worked is $81,800 for the US, in comparison to India’s $10,400. This also explains lower per-capita income in India, which can only grow with more incentive for agriculture and MSME sectors.

The MSME sector which for long has suffered from the inverted duty structure (IDS). A recent study by CUTS International of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. IDS implied the MSMEs are not competitive as their input cost is higher and therefore has difficulties in scaling up.

Also read: Balancing Reform and Reality: The GST Dilemma for MSMEs

MSMEs produce goods typically consumed by low and middle-income households, which have a higher marginal propensity to consume. These businesses are integral to daily life, offering products and services ranging from baby food and biscuits to medicines, education, healthcare, hotels, and travel.

Over the last few years, tax reforms have only benefitted the big corporate sectors. India’s success story in manufacturing has traditionally been driven by a capital-intensive mode of production, with major corporates like Reliance, TATA, Birla, and others dominating the sector. However, these corporate houses are not able to create enough employment opportunities which is needed for sustaining consumption.

Between 2016 and 2023, people in the bottom 20 quintiles has seen their income growth decline by 20% whereas those in the top 20 quintiles has seen their income grow by 20%. The growth in income for this top 20 quintiles is because of highly skilled new-age workforce (often foreign returned) like doctors, legal experts, engineers and MBAs working for the global consultancy firms and global capability centres of multinational based in India. On the other hand, a growing economy is also witnessing creation of low-paid and low-productive jobs such as housekeeping, security services, and other gig type jobs such as Zomato delivery boys, which in a way is contributing to widening income inequality.

Due to lack of adequate skills and inability to absorb labourers in capital intensive manufacturing, migration is happening from agriculture to low-skilled services sectors. Even for the middle-class population they are facing problem with higher cost of healthcare and education. At a time when public spending (Central and State governments taken together) is only 4.5% of GDP, it is not surprising that for a majority of the population, education is delivered by the private sector.

A higher allocation of funds towards education and healthcare is essential, alongside a focussed intervention in agriculture and MSME sectors. As long-term data suggests, countries like China, South Korea, Singapore, and Thailand were able to grow their per-capita income by investing in quality primary education and healthcare systems – an approach that can be replicated through sustained, increased budgetary allocation.

Nilanjan Banik is professor, Mahindra University, Hyderabad.

‘On All Fronts, Economy Not in Great Shape’: Modi Govt’s Former Chief Economic Advisor

Arvind Subramanian says that to tackle the problem the government needs to change its ‘DNA and instincts’.

The first Chief Economic Advisor of the Modi government, Arvind Subramanian, who served from 2014 to 2018, has said, 48 hours before the budget is delivered on February 1, that “on all fronts, the economy is not in great shape”.

He says there is no doubt that the economy is slowing down and this is not a short-term slow down but structural.

Subramanian adds that to tackle the problem the government needs to change its “DNA and instincts” because the government’s handling of the economy is the problem.

Subramanian identified three areas where this change is most required. They are: the national champions policy which the government is pursuing, the weaponisation of the state in all its different aspects and the policy of protectionism. As he put it, “a deeper recalibration of policy is needed…the government needs to go back to the drawing board and accept that what it’s doing hasn’t worked”. In other words, the current model of handling the economy is not working.

Subramanian, who is at present a senior fellow at the Peterson Institute for International Economics in Washington DC, said that unless the government can rethink its handling of the economy it’s not plausible to believe that India can become Viksit Bharat and a developed country by 2047.

Asked if there was a danger India could become old before it becomes rich, Subramanian said the real danger he sees is that India could become old before it becomes a credible middle income country with a per capita income of $5,000. At the moment India’s per capita income is $2,500 – $2,600.

Balancing Reform and Reality: The GST Dilemma for MSMEs

Introduced in 2017, the Goods and Services Tax (GST) was envisioned as a transformative reform to unify India’s complex taxation system under the banner of ‘One Nation, One Tax.’

For India’s Micro, Small, and Medium Enterprises (MSMEs), GST has been a double-edged sword, presenting both opportunities and challenges. While the system has simplified tax processes for some, many MSMEs continue to grapple with compliance complexities, increased costs, and disrupted cash flows. This dual impact underscores the delicate balance between ambitious policy objectives and the realities faced by small businesses.

Two primary factors drive this tension: the formalisation of the informal economy, while boosting GST collections, has disrupted supply chains and slowed business growth due to heightened compliance burdens.

Additionally, the restructuring of supply chains under formalisation has increased operational costs, stifling the entrepreneurial spirit and hampering competitiveness of small enterprises.

With the upcoming 2025 budget, there is hope for reforms that address these persistent challenges.

With 3.16 crore MSMEs registered under GST, contributing about 30% to India’s GDP and nearly 50% of its exports, MSMEs are critical to the nation’s economic growth and resilience. As the second-largest job creators after agriculture, they employ 80% of the industrial workforce while accounting for just 20% of total investment. MSMEs bridge economic disparities with their deep understanding of local markets and adaptability, creating jobs in smaller towns and rural areas where large corporations are reluctant to invest.

Initially met with scepticism, the GST regime has seen a growing acceptance among MSMEs, though significant challenges remain. Deloitte’s GST@7 survey shows that 78% of MSMEs now view GST favourably, up from 66% in 2023. While this shift reflects increased acceptance of tax reform, concerns about compliance complexities, cost burdens, and the impact on business growth and adaptability highlight the need for further improvements.

Since its rollout, GST has had a mixed impact on MSMEs across India, with significant disparities in compliance and registration trends. States like Tamil Nadu and Karnataka have led the way in GST implementation, along with Gujarat and Maharashtra, which have created MSME-friendly environments through higher business registration rates, technology adoption, and support centres to simplify compliance.

However, states like Bihar, Jharkhand, Uttar Pradesh, Chhattisgarh, and parts of the Northeast continue to lag, with compliance and registration rates as low as 40-50%. These regions face challenges such as limited technological access, inadequate infrastructure, and overly complex regulations, leading to increased operational costs and barriers for small businesses. In a positive development, the GST Council has proposed reducing the Tax Collected at Source (TCS) rate for e-commerce operators from 1% to 0.5% in 2024.

This aims to ease working capital pressures on MSMEs reliant on e-commerce platforms, enhancing their cash flow and enabling reinvestment for growth. Despite these efforts, MSMEs in lagging states continue to face high costs and technical complexities, underscoring the uneven impact of GST. Overcoming these disparities demands state-specific interventions to address gaps in infrastructure, technology, and support systems. Such targeted efforts are essential to ensuring GST drives inclusive growth and empowers MSMEs across the country.

First, the GST regime presents significant challenges for MSMEs, stemming primarily from the complexity of multiple tax slabs and the disproportionate tax burden. One example is the “inverted duty structure,” where MSMEs manufacturing spare parts for large automobile companies and other industries face an 18% tax rate, while the finished product, such as a tractor, is taxed at just 12%. Such disparity places MSMEs in a disadvantageous position, exposing them to potential exploitation and financial strain.

Moreover, MSMEs are initially exempted from paying GST up to a turnover of Rs 40 lakh, the challenges begin once they cross this threshold. Upon becoming eligible to pay the standard 18% GST rate, their effective income drops to Rs 32.8 lakh – a reduction of Rs 7.2 lakh. This significant deduction not only strains their financial stability but also hampers their ability to reinvest, expand and creates a growth ceiling; curbing their entrepreneurial potential and the vision of a simplified tax system.

A balanced GST structure is essential to bridging the gap between MSMEs and the larger companies they supply. For instance, instead of MSMEs paying 18% GST on spare parts while larger firms pay 12% on finished products, a unified middle-ground rate of 15% could promote fairness. Furthermore, consolidating GST slabs into three categories – 5%, 15%, and 28% – could streamline compliance, reduce complexity for MSMEs, and ensure uniformity across industries. This restructuring would simplify the tax framework, making it more accessible for smaller businesses while maintaining revenue neutrality (see table below).

Composition % of Products under GST	GST Levied	Alternative
22% of products	Upto or 5%	5%
18% of products	12%	15%
47% of products	18%	15%
13% of products	28%	28%

This approach could streamline tax compliance and ensure a more equitable distribution of the tax burden. Additionally, such measures could build trust between MSMEs and larger enterprises, fostering stronger collaboration and a more efficient supply chain.

Second, filing tax returns on the GST portal has been fraught with inefficiencies, often resembling a trial-and-error approach. Despite efforts to digitise and streamline the taxation process, technical glitches in the GST portal remain a persistent issue. For instance, large companies reliant on supplies from MSMEs must wait up to four months to claim tax benefits. To expedite this process, these larger players often withhold payments to MSMEs, depriving them of essential working capital. Additionally, MSMEs are pressured to file monthly GST returns to facilitate quicker claims for their clients. This not only undermines the intended simplicity of GST but also adds unnecessary compliance costs, further burdening MSMEs.

Moreover, GST compliance imposes significant challenges for MSMEs. Businesses with an annual turnover exceeding Rs 7.5 million face stringent requirements to collect and report transaction-wise data on the electronic portal. Exporters, previously exempt from input taxes, must now pay taxes upfront and claim refunds post-filing, straining their working capital. Additionally, exporters without a letter of undertaking or bond must collect taxes on exports as if they were domestic sales. Informal and marginal businesses, burdened by new tax obligations and compliance costs, risk closure, potentially causing a ripple effect throughout the value chain.

In this context, one potential solution could be to mandate MSMEs raising invoices after receiving cash payments from these larger companies, rather than on an accrual basis. This would ensure better cash flow management for MSMEs and prevent undue financial strain caused by delayed payments. Additionally, the practice of forcing MSMEs to file returns on a monthly basis could be alleviated by introducing a provision that allows quarterly filings. This adjustment would reduce the compliance burden on small businesses, giving them more flexibility to focus on their operations rather than grappling with frequent paperwork.

Let us not overlook that the GST portal itself also requires significant improvements to better support MSMEs. For example, instead of forcing businesses to refile an entire return due to a minor error, the portal should include user-friendly options to correct mistakes directly. Clearer rules, coupled with an efficient digital infrastructure, would enhance compliance rates while alleviating the financial and administrative burdens that currently hinder MSME growth.

Though GST has streamlined taxation and boosted revenue collection, challenges like increased compliance costs, supply chain disruptions, and burdens on small enterprises have hindered its welfare impact. For many MSMEs, these issues have stifled growth, exposing gaps in policy design and implementation. India’s experience echoes global challenges with similar reforms. Malaysia, for instance, repealed its GST in 2018 due to public dissatisfaction and adverse effects on small and medium businesses. In contrast, the European Union’s VAT system has succeeded by incorporating tailored exemptions and subsidies to support smaller enterprises. The 2025 budget presents a vital opportunity to address MSME challenges and expectations. Key demands include technological integration, such as linking the GeM portal to Udyam registration for better market access, a Technology Upgrade Fund for industries beyond textiles, and GST exemptions for recycling machinery to support sustainability. Simplifying the GST framework – by merging tax slabs, introducing faceless audits, and reducing compliance costs – is another priority. Stakeholders also call for incentives to foster innovation in renewable energy and AI while easing the tax burden on small businesses. A balanced approach of regulatory reforms, fiscal relief, and targeted investments can empower MSMEs to drive innovation, employment, and economic growth.

Vrinda Mandovra is a student of economics honours at FLAME University, Pune. Rituparna Kaushik is an assistant professor of economics at FLAME University, Pune. All views expressed are personal.