‘The budget for the Ministry of External Affair deserves closer scrutiny’
| Photo Credit: The Hindu

When the Union Budget is presented every year, most of the public attention often centres on taxation, infrastructure, and defence. In this, however, the budget for India’s Ministry of External Affairs (MEA) deserves closer scrutiny. Last year, the MEA budget saw a rare 23% spike, up from the modest 4% annual increase between 2017 and 2023. Despite efficient Budget utilisation, exceeding 96% of the revised estimates, the MEA remains one of the least-funded Ministries. The MEA’s allocation not only reflects the government’s foreign policy priorities but also its capacity to deliver on its global ambitions and commitments.

The vision of a ‘Viksit Bharat’ by 2047 hinges on sustained global partnerships. Here, India is positioning itself as a global leader: from leading the Global South; strengthening ties with the Association of Southeast Asian Nations; enhancing regional connectivity, engaging with the Quad (India, Australia, Japan and the U.S.) and creating institutions such as the International Solar Alliance and the Coalition for Disaster Resilient Infrastructure.

Impact on plans

Partner countries also expect more from India, requiring a stronger MEA. Countries anticipate timely project delivery, financial support, and diplomatic follow-through. Yet, the MEA’s current budget — just 0.4% of India’s overall expenditure — falls short to deliver on these plans. In 2022, the Parliamentary Standing Committee on External Affairs suggested raising this to 1% of the total budget. While such an increase (approximately 63%) seems unlikely, even a gradual increase to 0.6% or 0.8% would signal intent.

Two areas demand greater budgetary resources to beef up India’s diplomatic clout: economic tools for regional integration and cooperation, and the MEA’s institutional capacity by expanding human resources and research expertise. India’s regional connectivity faced new challenges in 2024, including Bangladesh’s regime change, Myanmar’s instability, strained ties with Nepal, and the Maldives’ “India Out” stance. But visits by Sri Lanka’s President and Bhutan’s Prime Minister bolstered commitments in cross-border projects. Sustaining momentum under the ‘Neighbourhood First’ policy requires economic support, amid China’s growing influence. Enhanced financial backing is crucial for advancing connectivity initiatives in South Asia.

Foreign aid and shifts

Budgetary trends reveal nuanced shifts. India’s aid to foreign countries declined by 10% in 2024-25, while loans to foreign governments, increased by 29%. Approximately 50% of India’s grants is directed to its neighbourhood. Bhutan remained the largest recipient of Indian aid, reflecting historical ties and a new impetus on energy interdependence, including hydropower development and sub-regional grid connectivity. Aid to Bangladesh declined from ₹200 crore in 2023-24 to ₹120 crore in 2024-25, while Sri Lanka saw a 63% increase in budgetary allocation.

A notable shift is the move from outright grants to lines of credit (LoCs), with 45% of the LoCs directed to the neighbourhood, Bangladesh being the largest recipient at $7.86 billion. While LoCs enable sustainable infrastructure financing, they also demand robust disbursement and oversight mechanisms, stretching India’s diplomatic machinery.

Another critical indicator is MEA resources to build institutional capacity. These are less visible but critical catalysts to enable long-term growth, including through a stronger Indian Foreign Service (IFS), supported by an expert research ecosystem.

While the MEA’s training budget saw a 30% increase in 2024-25, overall capacity-building allocations remain insufficient. The IFS remains a chronically understaffed diplomatic corps. Coordination challenges, delayed expansion plans, and limited lateral entry efforts hinder progress.

Last year’s MEA budget allocation for its foreign missions, training programmes, and cultural diplomacy grew by only 7% but key academic institutions such as Nalanda University and South Asian University experienced cuts of 20% and 22%, respectively. While the MEA has invested massively in convening international conferences and dialogues to foster India’s image as a bridging and argumentative power, it must also find more budgetary resources to support policy-relevant and evidence-based research at Indian universities and think tanks.

Need for declassification, digitisation

According to the External Affairs Minister, S. Jaishankar, “Track 1 has been consistently ahead of Track 2 when it comes to diplomacy, foreign policy, and keeping up with the world.” If this is the reality, and “needs change” as the Minister beckoned, the MEA could lead by example by allocating specific resources in the next Budget to accelerate the declassification and the digitisation of hundreds of thousands of its records. Public e-access will help scholars map India’s rich diplomatic history, contest deeply-held myths and get a better grasp of the underappreciated context and constraints that regulate Track 1 decision-making. And in turn, such Track 2 research may also help current MEA decision-makers to learn from past successes and failures, avoid reinventing the wheel, and articulate India’s uniqueness based on the power of historical record, rather than mere political proclamation.

Riya Sinha is Associate Fellow at the Centre for Social and Economic Progress (CSEP), New Delhi. Constantino Xavier is Senior Fellow at the Centre for Social and Economic Progress (CSEP), New Delhi. The views expressed are personal

Almost all finance ministers of India have faced the challenge of widening the country’s tax net. While the debate over how few people pay income tax in India is old, what is less well-known is that many companies also avoid paying income tax. While only 2% of the population pays income taxes, nearly half of the companies that file income tax returns (ITRs) pay nothing at all.

How to widen the tax net remains a key question with no clear answer. Tax evasion, low wage growth, high unemployment, and high exemption limits mean that very few people qualify to pay income taxes. Additionally, accounting loopholes, low audit quality and income tax relief provided in 2019 have resulted in very few corporations actually paying income taxes. It’s true that the number of tax returns filed by individuals has more than doubled, from 3.35 crore in 2013-14 to 7.54 crore in 2023-24. However, many of these are zero-tax returns, filed simply for compliance purposes. The number of individuals filing zero-income tax returns has more than doubled, from 1.69 crore to 4.73 crore during the same period. The result is that the number of individuals actually paying income taxes has grown at a slow pace between 2013-14 and 2023-24—from 1.66 crore to 2.81.

Rising Exemption Limits

The exemption limit has been raised successively since 2013-14. From Rs 2 lakh, it has gone up to effectively Rs 7 lakh by 2023-24. In 2013-14, as many as half of all returns filed were zero-tax. By 2023-24, that share went up to 63%. Among individuals who pay taxes, almost half (47%) report incomes of up to Rs 5 lakh; 37% earn between Rs. 5-10 lakh, 13% between Rs. 10-25 lakh, and only 1% report income above Rs. 50 lakh.

While hiking the exempt income tax slabs over the years may make political sense, it does not make economic sense, especially when 84% of the population earns less than Rs. 10 lakh per annum—India’s per capita income is just around Rs. 2 lakh—and individuals earning up to Rs. 7 lakh are not required to pay income tax under the new tax regime. As many as 90% of eligible taxpayers in India pay anywhere from no tax to Rs. 1.5 lakh.

The top 1% of ITR filers pay 50% of the total personal income tax collection of India, while the top 9% pay 87% of the total tax, highlighting significant inequality and the challenges in widening the tax net. That’s a huge burden on these top 10% of filers. 

Corporate Filings

The situation among corporations is worse. Of the total 10.7 lakh corporate ITR filers, 57% report zero income, and another 33% earn between Rs. 0-50 lakh. In total, 90% of companies report earnings of just up to Rs. 50 lakh (corporations are taxed on profits, not income). Half (48%) of corporate filers pay zero income tax, while another 36% pay between Rs. 0-5 lakh in income tax. In terms of value, 84% of corporate filers contributed almost nothing to the total corporate tax collections of Rs. 7.16 lakh crore in the assessment year 2023-24. Again, the top 1% of corporate ITR filers pay 85% of total corporate income tax. 

All this highlights significant inequality and raises questions about the financial health of companies in India. Another catch is that agricultural income is exempt from taxation—that is half of India’s population. While that makes socio-economic sense, at least wealthier farmers could be brought under the tax ambit to provide a boost to tax collections.

Personal income tax, corporate tax, and GST collections account for one-third each of the total central government receipts. While tightening efforts to combat tax evasion by both individuals and businesses could bring in additional revenue, there is a limit to direct taxation as well. The government will need to focus on raising revenues through indirect taxes, while also considering the reintroduction of a wealth tax.

(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)

Disclaimer: These are the personal opinions of the author

In its latest monetary policy review earlier this month, the Reserve Bank of India (RBI) has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. 
| Photo Credit: Getty Images/iStockphoto

The story so far: The National Statistical Office (NSO) has estimated that India’s Gross Domestic Product (GDP) grew 8.2% in 2023-24, outperforming all economic forecasters’ projections. The NSO number even surpassed its own advance estimates that had indicated a 7.6% uptick in GDP last year, imputing a 5.9% rise in the January to March 2024 quarter from 8.4% in the third quarter. However, the fourth quarter is now reckoned to have clocked 7.8% growth, a tad slower than an upgraded 8.6% rise in the previous three months. Private consumption, a key metric that the revival of industrial investments hinges on, remained weak but was slightly better than in the first half of the year.

What are the growth prospects for this year?

In its latest monetary policy review earlier this month, the Reserve Bank of India (RBI) has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. Initial indicators for the first two months of this year suggest a sedate start. Industrial output growth slowed to a three-month low of 5% in April, as per data released on June 12. Goods and Services Tax (GST) collections, a proxy for consumption, surged to a fresh high of over ₹2 lakh crore in April, thanks to year-end compliances.

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While collections in May, based on transactions concluded in April, were healthy too, the growth rate slipped to just under 10%, the lowest since July 2021. But some of this slack could be spurred by the heat waves that have hit several parts of the country this summer, economists reckon. A projected above-normal monsoon is expected to help farm output rebound and perk up the rural economy. “We expect GDP growth for 2024-25 to be around 7.3%-7.4%, with the base effect pulling down the growth,” said Bank of Baroda chief economist Madan Sabnavis. Rating agency CRISIL’s estimate is a little lower than the RBI forecast at 6.8%, said its chief economist Dharmakirti Joshi.

Would a coalition govt. affect the economy’s management and reform momentum?

Following the Lok Sabha election verdict, Prime Minister Narendra Modi has returned to office for a third term as the head of a coalition government this time. There is a broad expectation of continuity in government policy, with the Prime Minister retaining top ministers with their portfolios unchanged, including Nirmala Sitharaman and Piyush Goyal at the helm of key economic ministries of finance, and commerce and industry, respectively. “We expect India’s strong medium-term growth outlook to remain intact, underpinned by the government capex drive and improved corporate and bank balance sheets. But upsides to medium-term growth prospects are likely to be more modest if reforms prove more challenging to advance,” said Fitch Ratings director Jeremy Zook.

While “broad policy continuity” is expected in areas such as the thrust on public capex to spur the economy and gradual fiscal consolidation, a BJP-led government that needs “to rely more heavily on its coalition partners” could find it tougher to push contentious reforms, particularly around land and labour, recently flagged as the party’s priorities, he noted. Moody’s Ratings was not as sanguine about fiscal management prospects as Fitch. The NDA’s “relatively slim margin of victory as well as the BJP’s loss of its outright majority in Parliament” may delay more far-reaching economic and fiscal reforms that could impede progress on fiscal consolidation, it said in a note. Moreover, it has cautioned that the near-term economic momentum masks structural weaknesses that pose risks to long-term potential growth, such as “high levels of youth unemployment”, “weakness in productivity growth” in India’s large farm sector that still accounts for 40% of all employment, and the decline in inward foreign direct investment (FDI) flows in each of the past three years.

What should one look for in the full-year Union Budget to be presented next month?

Taking charge of the Finance and Corporate Affairs Ministry this Wednesday, Ms. Sitharaman has said the reforms drive initiated after 2014 with an eye on bolstering India’s macroeconomic stability and growth, shall continue. The ministry will kick off Budget consultations with industry and other stakeholders in the coming week. While Ms. Sitharaman signalled that ‘ease of living’ for citizens will be a key pursuit for the government, industry expects the Budget to address ongoing policy challenges such as reining in inflation, spurring consumption and investments, and untangling knotty taxation issues such as the recently introduced 45-day payment deadline mandate for micro, small and medium enterprises that has inadvertently ended up hurting them.

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With the GST Council expected to meet next week, the Budget may also indicate the Centre’s plans to pursue rationalisation and reforms of the indirect tax regime that completes seven years on July 1. Some elements of the 100-day agenda items drawn up by ministries should also find space in the Budget, along with more concrete details of initiatives announced in the interim Budget presented before the polls. Ms. Sitharaman, who has recently voiced the need for Indian manufacturing to become more sophisticated and be part of global value chains, may also unveil some steps to catalyse this transition, including a reduction in some of India’s high import tariffs. While BJP allies like the Telugu Desam Party (TDP) and the Janata Dal (United) will, of course, expect some measures, or a package, to meet their aspirations for Andhra Pradesh and Bihar, respectively, at a broader level, this administration’s first Budget is expected to outline its agenda for this tenure and offer glimpses of the blueprint to make India a developed nation by 2047 that the Niti Aayog has been drawing up. The last few decades of India’s economic reforms story show that coalitions have also been effective in driving critical and contentious changes, such as the privatisation drive kicked off by the Atal Bihari Vajpayee government. This Budget could reveal if this coalition-dependent government has a fresh and possibly more consensual approach in mind to deliver on India’s reform agenda.