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‘The Budget’s policy announcements and fiscal plans need closer scrutiny’
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The Union Finance Minister, Nirmala Sitharaman’s presentation of the Union Budget on Saturday, February 1, was against the backdrop of pressing macroeconomic challenges — persistently high taxes and unemployment squeezing the middle-income class, subdued private investment, mounting external vulnerabilities that threaten to derail the growth story, and a looming fiscal overhang. While the Finance Minister laid out an ambitious road map for Viksit Bharat, spanning agriculture, manufacturing, micro, small and medium enterprises (MSME), social welfare, and infrastructure, the Budget’s policy announcements and fiscal plans need closer scrutiny.

Targets that raise questions

First, the fiscal consolidation target of 4.4% of GDP in FY26 is a key highlight of the Budget. However, achieving this target hinges on ambitious revenue projections, including a 11.2% growth in total tax revenues and a 14.4% increase in income tax revenues compared to FY25 estimates. These assumptions appear overly optimistic given the significant tax cuts announced in the Budget and the prevailing economic headwinds such as softening domestic consumption and weakening external demand. Much will also depend on the success of the second asset monetisation plan (2025-30), announced in the Budget. The underperformance of the previous asset monetisation programme raises valid concerns. Furthermore, the estimated ₹11.54 lakh crore in net market borrowings risks crowding out private capital at a critical juncture when credit demand remains tepid. Achieving the ambitious revenue targets will require improved tax buoyancy, more efficient tax administration, and realistic asset monetisation strategies to ensure that the fiscal consolidation plan remains on track.

Second, the revisions in personal income-tax rates and slabs under the new tax regime, exempting incomes up to ₹12 lakh from tax (after factoring in the rebate benefit), and significantly reducing tax liabilities across various income brackets, offer welcome relief to middle-income taxpayers.

However, while these changes are likely to boost disposable income, they shall come at a cost — of ₹1 lakh crore in foregone direct tax revenue, which, in turn, could constrain the government’s ability to fund critical developmental initiatives. The tax-base erosion also comes when household savings have shown a structural decline over the past decade, dropping to 18.4% of GDP in FY23 (Economic Survey 2024-25). This raises pressing questions about the long-term sustainability of these tax cuts, particularly when public investments in infrastructure and social welfare remain critical to drive inclusive economic growth.

Third, on the manufacturing front, the Budget reiterates India’s ambition to emerge as a global manufacturing powerhouse. The Economic Survey 2024-25 flagged India’s underperformance in manufacturing, which accounts for a mere 17% of GDP. While production-linked incentives (PLIs) have shown moderate success in sectors such as electronics, their scalability and long-term impact remain uncertain. In that light, the Budget announcements on enhanced credit facilities for MSMEs and the launch of a National Manufacturing Mission aimed at improving ease of doing business, to foster a future-ready workforce, and promote clean-tech manufacturing, are important steps. The revision of MSME classification criteria — increasing investment limits by 2.5x and doubling turnover thresholds— may improve scale economies. However, the measures fall short of addressing core competitiveness issues such as regulatory inefficiencies, infrastructure gaps, and low innovation capacity. The absence of concrete measures to boost industrial research and development — currently at a dismal 0.64% of GDP — undermines India’s ability to compete with innovation-driven economies such as China and Germany. While the Budget’s focus on manufacturing is a step in the right direction, achieving global competitiveness will require deeper structural reforms and sustained investment in innovation and infrastructure.

The gaps remain in agriculture

Fourth, agriculture, a key pillar of the economy, received significant attention through initiatives such as the Prime Minister Dhan-Dhaanya Krishi Yojana and the National Mission on High-Yielding Seeds. These measures are with the aim of enhancing productivity and climate resilience, which are critical for food security. The increase in the Kisan Credit Card (KCC) loan limit from ₹3 lakh to ₹5 lakh, along with targeted interventions in 100 low-productivity districts, signals a strategic pivot from blanket subsidies to precision support, empowering farmers with greater financial flexibility. However, the measures fall short of addressing systemic inefficiencies in agricultural markets. The Budget lays an emphasis on credit enhancements, yet the focus on short-term loans perpetuates the dependency of farmers on debt without addressing the issues of price volatility or market access. Moreover, the absence of concrete measures to promote agricultural exports — particularly as India eyes leadership in millets and natural farming — represents a missed opportunity.

Fifth, while the Budget introduces some promising measures for the external sector, significant gaps remain unaddressed. Services exports, particularly in IT and business process outsourcing, continue to grow at a robust 10.5% CAGR, but budgetary efforts to diversify the export portfolio remain insufficient. Trade facilitation initiatives such as Bharat Trade Net (BTN) and export credit support for MSMEs, which were announced in the Budget, are positive steps but lack the scale required to tackle India’s persistent trade deficits. Moreover, the challenges posed by the depreciation of the rupee and declining forex reserves require a more ambitious export strategy. The fiscal push to value-added sectors such as pharmaceuticals, electronics, renewable energy, and high-value agricultural products could have strengthened India’s position in global supply chains and enhanced export competitiveness.

Not a transformative push

Finally, while the Budget signals intent on climate action and clean energy, its financial commitments reveal a cautious, incremental approach rather than a transformative push. The Budget’s focus on supply-chain resilience — through incentives for lithium-ion battery recycling, duty exemptions on critical minerals, and support for domestic solar photovoltaic and battery manufacturing — is a pragmatic move to reduce import dependence. However, without a parallel investment in grid modernisation, energy storage, and industrial decarbonisation, the transition to a low-carbon economy will remain fragmented.

The Budget’s fiscal outlays will eventually be judged by how effectively they address the fundamental trade-offs of Indian growth: how to unleash private enterprise while ensuring inclusive development; how to boost consumption without compromising savings, and how to accelerate growth while maintaining macroeconomic stability. Ultimately, the credibility of execution and the government’s willingness to course-correct where necessary will matter.

Amarendu Nandy is an Assistant Professor (Economics Area) at the Indian Institute of Management (IIM) Ranchi. The views expressed are personal

Photo used for representation purpose only.
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Lack of localisation and complexity of the Indian textile value chain result in higher costs for Indian exporters in the textile sector, relative to global competitors.

India’s textile production occurs across multiple independent and clustered Small and Medium Enterprises (SMEs) spread across the country. In contrast, vertically integrated ‘fibre-to-fashion’ firms in competitor nations such as China and Vietnam export low-cost products, maintain consistent quality, and are “nimble enough to adjust to the fast-changing nature of the industry,” said the Economic Survey.

Simple and liberal customs procedures further reduce regulatory costs and lend a competitive edge to the exports of global textile competitors such as China and Vietnam. On the other hand, in India, textile exporters are constrained by complex procedures.

Apart from possessing structural attributes (such as vertical integration, liberal labour laws, etc.) that allow for cost advantages, competitors in the textile markets also have the added benefit of Free Trade Agreements (FTAs) with consumer countries. In effect, Indian apparel exports do not face a level playing field compared to its competition.

In general, the costs for the textile industry are likely to rise over the coming years mainly because of the global structural shift towards sustainable sourcing. The EU, for instance, has as many as 16 pieces of legislation spanning the entire fashion value chain, which came into force between 2021 and 2024.

As the EU accounts for nearly 20% of India’s exports, such a shift poses a challenge for small enterprises that need to shift to environmentally sustainable production methods, says the Survey.

India has a great opportunity to align with the evolving global shifts in apparel demand because of the changing trends in the global textile industry. The global demand has shifted to products made from man-made fibre (MMF). As per the International Cotton Association, MMF comprised 77% of global fibre consumption in 2024, whereas it was just 22% for cotton. Indian textile and apparel exporters can benefit by tapping into the MMF value chain.

India’s share of global MMF production is currently 9.2% and the potential to catch up with the production levels of global leaders like Vietnam, China, and Taiwan is high. The MMF sector must move towards vertical integration and significantly invest in research and development and sustainable production techniques.

The industry should step up its research efforts and vertically integrate and tailor products to international quality and sustainability requirements. “Simplification, consolidation, and elimination of processes that consume the financial and managerial bandwidth of our exporters is a low-hanging fruit,” the Survey said.

A worker operates a machine inside a small scale manufacturing unit in Mumbai. File
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The Supreme Court has held that banks or creditors are required to identify the incipient stress in the account of the Micro, Small and Medium Enterprises (MSMEs), before their accounts turn into non-performing assets.

A Bench headed by Justice Bela Trivedi pronounced the recent order in a batch of appeals filed by MSMEs, represented by advocate Mathews J. Nedumpara, focusing on a notification ‘Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ issued on May 29, 2015 under Section 9 of the MSMED Act, revised by the Reserve Bank of India (RBI) in March 2016 in exercise of the powers conferred by Section 21 and 35(A) of the Banking Regulation Act.

The court held that the May 2015 notification has “statutory force binding to all Scheduled commercial banks, licensed to operate in India by the RBI”.

“The entire exercise as contained in the ‘Framework for Revival and Rehabilitation of MSMEs’ is required to be carried out by the banking companies before the accounts of MSMEs turn into non-performing asset (NPA),” the court held.

However, the Bench directed that it would also be incumbent on the part of the MSMEs concerned to produce authenticated and verifiable documents/material for substantiating its claim of being MSME before its account is classified as NPA.

“If that is not done, and once the account is classified as NPA, the banks i.e. secured creditors would be entitled to take the recourse to Chapter III of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Act for the enforcement of the security interest,” the two-judge Bench ordered.

The appellant MSMEs had challenged a Bombay High Court decision of January 11, which dismissed their writ petitions. The High Court had held that banks and Non-Banking Financial Companies (NBFCs) were not obliged to adopt the restructuring process as contemplated in the May 2015 notification without any specific applications for the purpose from MSMEs.

Mr. Nedumpara had argued that the banks could not have classified the loan accounts of the MSMEs as NPA without following the procedure laid down in the May 2015 notification.

“It was incumbent on the part of the banks/ NBFCs to identify incipient stress in the account… and to explore various options to resolve the stress in the account as contemplated in the May 2015 notification,” Mr. Nedumpara had argued.

The revamped credit guarantee scheme for Micro, Small and Medium Enterprises (MSMEs) will take effect from April 1, through infusion of ₹9,000 crore in the corpus, said Union Finance Minister Nirmala Sitharaman while presenting the Union Budget 2023.

“This will enable additional collateral-free guaranteed credit of ₹2 lakh crore. Further, the cost of the credit will be reduced by about 1%,” she said.

“Further, in cases of failure by MSMEs to execute contracts during the COVID-19 period, 95% of the forfeited amount relating to bid or performance security will be returned to them by government and government undertakings. This will provide relief to MSMEs”, the Finance Minister said.

The total allocation for the MSME Ministry will see a nearly 42% increase for 2023-24 with ₹22,138 crore to be made available compared to ₹15,629 crore in 2022-23. Schemes such as Raising and Accelerating MSME Performance (RAMP) and Scheme for Fund for Regeneration of Traditional Industries (SFURTI) will see significantly higher allocation compared to FY23.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) and the Coimbatore District Small Industries Association (CODISSIA) said in press statements that to ensure MSMEs received payments on time, the Budget has proposed that deduction for expenditure incurred on payments made to MSMEs will be allowed for buyers only when the payment is actually made. This means buyers cannot claim deduction without paying the MSMEs.

The FISME added that setting up of a National Financial Information Registry will help create a robust information system and help MSMEs access loans. The Common Universal Identifier for businesses proposed in the Budget will also rid MSMEs of the need for having multiple identities, it added.