Expectations from the Budget depend on the economic context in which it is presented. Important macro factors like the economy's growth rate, tax revenue buoyancy, and fiscal situation are important. 

Challenging economic context
The macro scenario in early 2025 is very much different from what it was in early 2024. Last year, the finance minister was comfortably placed. The economy was in a sweet spot: Surprising GDP growth of 8.2 per cent, better-than-expected revenue growth of 18 per cent, and the government got an unexpected bonanza of Rs 1 lakh crore as an additional dividend from the RBI.  

This year, the picture is different. GDP growth has slowed down to an estimated 6.4 per cent for FY25. Personal income tax collections are good, but GST revenue growth is modest, and corporate tax collections are flat. The bonanza the government got from RBI last year is unlikely this year. 

Growth revival
The biggest challenge before the government is to provide the fiscal stimulus to revive the GDP growth. After achieving above 7 per cent average GDP growth during the three years from FY22 to FY24, growth has declined to an estimated 6.4 per cent in FY25. Top priority of the government should be the revival of growth and to achieve this, the Indian economy needs both monetary and fiscal stimulus. Monetary stimulus by cutting interest rates is likely in the February policy meet. The government can set the trend through fiscal stimulus in the 2025 Budget. 

Personal income tax cuts
Personal income tax cuts will serve two purposes. One, it will provide the much-needed relief to taxpayers, particularly the middle class, who have been impacted by inflation. Two, tax cuts will increase taxpayers' disposable income, facilitating higher spending. This will boost consumption and stimulate growth. Therefore, personal income tax cuts can be expected from the Budget. But how much? There are claims for big tax cuts and rumours of major rate cuts, with the exemption limit being raised to Rs 10 lakh. Such big reliefs are unlikely. Personal income tax collection has been doing well mainly due to better compliance facilitated by digitalisation. If exemption limits are raised steeply, a significant segment of taxpayers will go out of the tax net. The government is unlikely to do this, particularly in the present context of slowing growth and a modest increase in tax revenue.

Time for a simpler I-T system 
Ideally, we should move towards a simple four-slab income tax structure with tax exemption up to Rs 5 lakh, 10 per cent tax for the slab Rs 5 to 10 lakh, 20 per cent for the slab Rs 10 to 30 lakh and 35 per cent for income exceeding Rs 30 lakh. This is unlikely this year, but the exemption limit is likely to be raised to Rs 5 lakh. Some reductions of the rates for different slabs are likely, to provide relief. The concessions are likely to be confined to the new tax regime without tax exemptions. 

Fiscal consolidation to continue
A major achievement of the Modi government is its success in reducing fiscal deficit. The fiscal deficit, which spurted to 9.2 per cent in FY21 due to the unexpected increase in public expenditure caused by COVID-19, has been steadily brought down to 5.6 per cent in FY24. The fiscal deficit for FY25 is likely to be lower than the Budget estimate of 4.9 per cent. The government is likely to continue on the fiscal deficit reduction path and target a fiscal deficit of 4.5 per cent for FY26. Fiscal consolidation is important since high fiscal deficit increases borrowing and raises the debt-GDP ratio to risky levels.

Market has modest expectations
The stock market is not expecting any concessions from the Budget this year. No changes are expected in securities transaction tax and taxation of dividend and capital gains. Market will be keenly watching for fiscal stimulus for growth, tax relief for the middle class and the fiscal deficit numbers. 

Welfare spending will be stepped up
The government's flagship programmes like PM Awas Yojana, Ayushman Bharat, Har Ghar Jal Scheme, and PM Kisan Yojana are likely to get higher allocations. The free food grain distribution scheme, for which the allocation was Rs 2,02,520 crore in FY25, will need additional allocation for FY26. 

Focus on novel spending programmes likely
An area of concern is the government’s capital expenditure falling short of the target, partly due to election-related restrictions. Also, there are execution issues. Despite an allocation of Rs 11.11 lakh crore for capital expenditure in the 2024 Budget, the money is not getting spent. Therefore, the Budget may come up with novel projects where money can be efficiently spent. Urban infrastructure is a likely focus area for government capex.
(The writer is chief investment strategist at Geojit Financial Services.)

The comments posted here/below/in the given space are not on behalf of Onmanorama. The person posting the comment will be in sole ownership of its responsibility. According to the central government's IT rules, obscene or offensive statement made against a person, religion, community or nation is a punishable offense, and legal action would be taken against people who indulge in such activities.