Union Budget 2025: The single biggest piece of reform will come next week. The finance minister has said that she will introduce a new income tax bill in Parliament next week. India has been waiting for a new direct tax code — the new bill could pretty much be that — for decades now.
The budget also slashed customs duty on several products. This is in keeping with the stated objective of correcting what has often been criticised as an inverted duty structure where inputs face higher tariffs than finished products. This adds to the costs of products made in India and makes them less competitive in export markets. How far this year’s customs duty corrections take us towards getting rid of inverted duties will have to wait for more detailed analysis of input-output and export-import dynamics in the economy.
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But the big picture is important. Having implemented the Goods and Services Tax in 2017 (it was the single biggest reform in domestic indirect taxes since Independence), making substantial corrections to customs duties in this year’s budget, and announcing a roll-out of a new direct tax law next week, the Narendra Modi government can take rightful credit for widespread, much-needed tax reforms in the Indian economy over the last decade.
But taxes are not the only big reform promise in the budget.
The speech also talks about setting up a High-Level Committee for Regulatory Reforms for a review of all non-financial sector regulations. There was also the promise of a second version of the Jan Vishwas Bill. The first one removed or decriminalised 180 regulations related to business. The second one aims to decriminalise another 100, the finance minister said.
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All this comes in the backdrop of the Economic Survey calling for unleashing second-generation Ease of Doing Business reforms in the economy. It also spoke about how reforms are needed to help small and medium businesses rather than bigger companies, which, it said, anyway find a way around the compliance burden. The Economic Survey made it clear that India has to rejuvenate its MSME sector in order to realise the full economic potential of manufacturing. Expectedly, an entire section of the budget was focused on MSMEs.
The budget also talked about further reforms in the financial sector such as allowing 100% instead of 74% FDI in the insurance sector, provided companies invest their entire premium earnings in India. This could potentially create new sources of long-term infrastructure finance.
All of this will be music to the ears of entrepreneurs in the country. To be sure, some of these promises will also take time to materialise. And they are not exactly new or a radical departure from the past intentions of the government. But the sentiment boost, at least on the tax front, should be immediate. And the fact that the government continues to prioritise capital spending while reducing the fiscal deficit is something which underlines its pro-market credentials.
India has many regulatory hurdles and incentive problems outside the budget’s purview. Some of these are driven by politics, such as states (including those ruled by the BJP and its allies) prioritising populist spending over productive expenditure in the hope of wining elections. Some of the regulatory cholesterol could just be on account of lack of state capacity or attention across states.
It remains to be seen whether the Centre argues for a strengthening the incentive scheme under the new Finance Commission awards which are due later this year. This will not be an easy thing to achieve. It is expected to face pushback from the states in this forum on account of things such as the rising ambit of centrally sponsored schemes which require contribution from states and therefore eat into their discretionary spending or the actual share of states in the Centre’s tax revenue staying much below the mandated 41% level. This is because a large part of the Centre’s revenues are outside what is called the divisible pool.
The budget does talk about nudging states to pursue business friendly reform by talking about launching an Investment Friendliness Index of States this year “to further the spirit of competitive cooperative federalism”. Once again, when read with the Economic Survey’s commentary, this could ask for critical, politically difficult reforms in factor markets, especially those including land or labour. These objectives will also have to keep in mind the diversity among Indian states, sensibilities and interests of vulnerable groups such as indigenous people or critical environmental concerns in fragile ecosystems. The budget speech has hit the right note when it summarises the imperative for reforms. “Reforms, however, are not a destination. They are a means to achieve good governance for our people and economy,” it says. Who can disagree with that?
