Important reforms aimed at reviving India’s economy are outlined in the Union Budget 2025-26. To encourage investment and improve compliance, the tax system has been simplified. Subsidies and credit growth provide substantial support to the agriculture industry, fostering sustainability. Funding for infrastructure supports urban development and the power industry concentrates on the transition to renewable energy. Improved loan availability and regulatory relief are advantageous to MSMEs. Mining reforms are intended to increase efficiency and export incentives are strengthened to increase competitiveness. Regulations in the financial sector are also altered to promote stability, openness and expansion.
The Union Budget for FY 2025-26 includes significant fiscal allocations to meet the targeted growth and development goals of the various sectors, guaranteeing consistent economic growth. Union Budget for FY 2025-26 estimates a total revenue expenditures of ₹ 39,44,255.27 crores or 77.87% of the total budget, while capital expenditure will amount to ₹11,21,089.77 crores, or 22.13% of the total budget Union Budget 2015-26. With the emphasis on preserving operating expenses while allocating funds for long term capital development to support infrastructure and sustained economic growth, these budgetary provisions demonstrate a balanced approach.
Although the Union Budget for FY 2025-26 takes a balanced approach to financial distribution across different sectors of the economy, it highlights a number of crucial tactics meant to promote growth and development in particular fields. Notably, a number of important clauses are anticipated to have a significant positive impact on worker in the public and commercial sectors. These programmes are aimed to boost economic prosperity by increasing productivity, expanding employment and improving the working environment for professionals in a variety of areas. The section below discusses the major policy modifications of the Union Budget 2025-26.
Tax Reforms to Boost Middle-Class Consumption
The Union Budget raises the income tax exemption limit to ₹12 lakh, with revised tax brackets for individuals earning up to ₹24 lakh annually. This reduction in the effective tax burden is expected to augment disposable income, thereby increasing household consumption. The anticipated rise in consumption expenditure is likely to stimulate aggregate demand, driving growth in various sectors. This boost in private consumption is crucial for enhancing economic activity, supporting recovery, and strengthening domestic demand-driven growth in the short to medium term.
Support for Agriculture
An outlay of ₹2.66 lakh crore has been allocated for rural development, focusing on enhancing agricultural productivity and sustainability. Significant investments are directed towards agricultural research, specifically for developing climate-resilient crop varieties Union Budget 2025-26. Additionally, a comprehensive natural farming initiative aims to transition one crore farmers to eco-friendly practices over the next two years. These measures are designed to improve agricultural output, promote environmental sustainability, and strengthen the rural economy, aligning with long-term goals of food security and climate adaptation. In this regard, agriculture mission / programs are introduced such as the Prime Minister Dhan Dhanya Yojna, Six-year Mission for Atmanirbharta in Pulses, National Mission on High Yielding Seeds, Mission for Cotton Productivity, Programme for vegetables and Fruits.
Investment in Skill Development and Employment
The budget outlines comprehensive skilling initiatives with a total allocation of ₹2 lakh crore over five years, targeting 4.1 crore youth Union Budget 2025-26. These programmes encompass vocational training, entrepreneurship development, and extensive internship opportunities, all designed to enhance employability and foster human capital development. By equipping the youth with relevant skills, the initiative aims to improve labour market outcomes, promote sustainable economic growth, and support the broader goal of reducing structural unemployment, thereby driving long-term economic productivity.
Infrastructure Development
The Union Budget for FY 2025-26 allocates a capital expenditure amounting to 22.13% to total union budget, to bolster infrastructure development. This includes ₹ 2,55,445 crore for the Ministry of Railways, focusing on modernising rail infrastructure, enhancing safety measures, and expanding services. The Ministry of Road Transport and Highways receives ₹ 2,87,333.16 crore to improve road networks, facilitating better connectivity and trade. Additionally, the Housing and Urban Affairs Ministry has been allocated ₹42,100 crore to develop urban infrastructure, supporting sustainable urbanization and economic growth Union Budget 2025-26 .
Support for MSMEs
The Union Budget for FY 2025-26 introduces a series of strategic measures to strengthen the Micro, Small, and Medium Enterprises (MSME) sector, a cornerstone for job creation and economic diversification within India’s informal economy. The credit guarantee limit for micro and small enterprises has been doubled from ₹5 crore to ₹10 crore, unlocking an additional ₹1.5 lakh crore in credit flow over the next five years.
Furthermore, a new initiative will provide term loans of up to ₹2 crore to 5 lakh first-time entrepreneurs, with a particular focus on women and marginalised communities such as the Scheduled Castes and Scheduled Tribes Union Budget 2025-26. These measures are designed to enhance liquidity, facilitate access to capital, and stimulate entrepreneurial activity. By fortifying the MSME sector, the budget aims to drive economic resilience, foster industrial competitiveness, and generate substantial employment opportunities, thereby contributing to broader economic diversification.
Although the strategic Union Budget 2025-26 demonstrates promising macroeconomic trajectories, several critical vulnerabilities warrant meticulous examination from a fiscal-monetary perspective:
Fiscal Deficit Expansion
The quantitative divergence in government’s fiscal stance demonstrates concerning expansion, primarily driven by the ₹1 trillion tax concession package. This fiscal profligacy risks triggering a substantive crowding-out effect in capital markets, potentially elevating borrowing costs across the private sector. The resultant dampening of private investment multipliers could lead to suboptimal capital formation, thereby attenuating the economy’s productive capacity and long-term growth trajectory.
Factor Market Rigidities
The budget’s inadequate attention to structural reforms in factor markets represents a significant oversight in addressing fundamental economic inefficiencies. Optimal Resource allocation and factor mobility are hampered by the continued existence of strict agriculture price discovery mechanisms and tight labour market structure. The economy’s output potential and competitive dynamics in international markets may be limited by the structural inertia, which limits the rise of total factor productivity.
Environmental Externality Considerations
The huge lack of strong environment pricing mechanisms, especially when it comes to the Mission Life Programme, indicates a potential weakness in how economic decision-making frameworks internalise environment costs. Future fiscal spaces may be constrained, and sustainable economic trajectories may be impeded by this oversight, which could lead to significant greater adaption expenditures in later fiscal cycles.
Monetary-Fiscal Policy Coordination
By prioritising demand-side stimulus measure above supply-side measure above supply-side reforms, it could be anticipated that the budget may generate and danger of creating inflationary pressures that will call for tighter monetary policy. The possible policy difference could counteract the planned fiscal multiplier effects, resulting in a less-than-ideal mix of policies that could obstruct growth acceleration and an efficient economy recovery.
Spatial Economic Imbalances
Regional differences in growth exists as a result of the uneven allocation of public investment. This special economic dispersion hinders economic convergences across states and sustains factor market distortions, as evidenced by the concentrated investment in developed regions. Goals for equitable growth and overall productivity increases may be hampered by the ensuing inefficiencies in resource use.
Policy Transmission Efficacy
The efficiency of policy transmission mechanisms is called into question by the variety of policy aims, possible implementation delays and contradictory consequences. In order to accomplish desired macroeconomic goals, this complexity may result in less than ideals policy outcomes and increased economic uncertainty, requiring close observation and possible recalibrating of policy tools.
In Conclusion
To sum up, the Union Budget for FY 2025-26 provides a thorough and well-rounded strategy for promoting economic growth, with specific plans for important industries including infrastructures, MSMEs, agriculture and skill development. For the desired economic results, However, issues including structural inefficiencies, regional imbalances and fiscal deficit problems must be given utmost attention. The success of these measures will depend largely on how well policies are transmitted, continuous monitoring and possible changes are required to create equitable and sustainable growth throughout the economy.
Author’s Bio: Dr. Motika Sinha Rymbai is a Teaching Assistant cum Analyst at the Bharti Institute of Public Policy, Indian School of Business. She holds a master’s degree in Economics, MPhil in Economics and is a Ph.D. in Economics from North–Eastern Hill University Shillong, Meghalaya. Her Ph.D. thesis is on “Macroeconomic Instruments, Public Healthcare Spending and Health Outcomes in the North-Eastern States of India”. She has authored nearly 10 publications in national and international journals. Her publications, including those in the Indian Economic Journal, Indian Journal of Public Health and the South India Journal of Social Sciences, examine fiscal policies, government capacity, and their impact on health outcomes, highlighting the region’s infrastructural challenges and economic potential. During her Ph.D., Dr. Motika was a Meghalaya Legislative Research Fellow, a programme by the Meghalaya government and Bharti Institute of Public Policy, ISB.