India Inc. should align its vision with the central government's approach, which focuses on building robust infrastructure across physical, technical, and social spaces to ensure progress across various income groups, according to an SBI report ahead of the Union Budget 2025-26.
The report highlights that strong profitability post-pandemic and accessible financing options, with a deep and vibrant capital market working alongside a revitalised banking system, bode well for investments that position India as a key player in the new global manufacturing landscape.
Recommending a progressive tax regime, the report suggests that the government can improve tax compliance and boost consumption by increasing disposable income, potentially moving everyone under the New Tax Regime at a nominal cost by forgoing some tax revenue.
It also notes that the tax regime and reforms in the taxation system have significantly increased tax collection over time.
Adherence to fiscal prudence remains crucial for the government while continuing fiscal consolidation. The report predicts that the fiscal deficit as a percentage of GDP could reach 4.5% in FY26 (Rs 15.9 lakh crore), which could become the new normal in an unpredictable world, providing flexibility for adjustments to boost inclusive growth.
Smart management of switch and buyback gross market borrowing (Rs 14.4 lakh crore) is expected in FY26, as part of COVID-19 pandemic borrowings are due for repayment, leading to a net borrowing of Rs 11.2 lakh crore (Rs 4.05 lakh crore redemption in FY26 and a switch of Rs 75,000 to 1,00,000 crore).
Direct taxes contributed 58% of total tax revenue in 2023-24, the highest in 14 years. Personal income tax (PIT) collections (7%) have risen faster than corporate tax collections (4%) since FY21.
The report also points out that a surge of women-centric schemes, introduced by several states with direct benefit transfers (some of which may be politically motivated), could strain state finances. The gap between revenue receipts and such expenditures could grow to 3-11% of states' revenue receipts.
As many states may continue introducing income transfer schemes for women, the Union government may be tempted to follow suit. The report suggests considering a universal income transfer scheme, with matching grants from the Centre to the states, to substantially reduce market-distorting subsidies.