By : Geetaali Malhotra

Abstract

Some budgets make history. Some merely make headlines. India’s Union Budget 2025-26 aspires to do both. It arrives with foreign investment, tax cuts, deregulation, and the ever-reliable promise of “ease of doing business.” But as any seasoned observer of Indian economic policy knows, a budget is often a Rorschach test: what you see depends entirely on where you stand.

The 100% FDI: Welcome to India, But Leave Your Capital Here

The headline-grabbing move: India will allow 100% Foreign Direct Investment (FDI) in the insurance sector. On paper, this appears to be a pro-capital, pro-market reform – a loud, flashing neon sign inviting global insurers to enter India’s booming financial sector. But as always, there’s a catch: investors must reinvest all premiums collected within India.

This model resembles a controlled liberalisation rather than full-fledged market openness. In contrast, China’s insurance liberalization strategy has been far more investor-friendly. China’s insurance sector liberalisation in 2018 removed foreign ownership caps, accelerating expansion. By 2022, foreign insurers controlled 20% of premiums in major cities like Beijing and Shanghai. China’s open policies have allowed global players to tap into high-growth areas like pensions, wealth management, and private insurance, leveraging investment management expertise. India, on the other hand, offers merely a half-baked liberalisation where foreign firms can enter, but they can’t freely manage their capital. Whether this approach will attract global giants or keep them at bay remains doubtful.

Decriminalization Reforms

The Jan Vishwas Bill 2.0, which decriminalises 100+ provisions across multiple business laws, is positioned as a bold step toward reducing India’s nightmarish red tape. The Bill promises to cut through India’s infamous bureaucratic red tape, making it easier to do business. No more endless paperwork! No more fear of minor legal troubles! Sounds great, right? However, deregulation often invites disaster, lest we forget IL&FS – the financial disaster that nearly crashed India’s economy.

Back in 2018, IL&FS, one of India’s biggest infrastructure finance companies, collapsed under ₹91,000 crore ($12.8 billion) of debt. ₹8.48 lakh crore ($119.43 billion) in investor wealth vanished, housing finance stocks crashed, and mutual funds went into panic mode. The government had to step in, take over the company, and launch a fraud investigation just to stop things from getting worse. While the company sank, IL&FS’s top bosses were making a fortune.  The chairman’s salary shot up by 144% in one year, while regular employees got a tiny 4.44% raise. Overseas, IL&FS was breaking the bank, so much that it couldn’t even pay its workers in Ethiopia, who ended up taking Indian employees hostage.

If all this happened with strict regulations in place, one can only imagine what could happen if businesses were allowed to operate with even fewer rules. Decriminalization can help honest businesses, but if it also lets reckless companies run wild, India could be heading towards another IL&FS-style disaster. If companies could pull off such massive fraud before, what’s stopping them from doing the same again?

Hidden Trails in the Union Budget 

The Union Budget 2025-26 performs a classic sleight of hand, offering tax cuts with one hand while quietly tucking the Census – the single most crucial tool for economic planning – away. With a mere ₹600 crore allocated for an exercise that was estimated to cost ₹8,754 crore in 2019, the decadal Census remains indefinitely postponed. Without fresh population data, policymaking becomes a shot in the dark. With the true state of income inequality, employment, and demographic shifts in question and in the absence of real numbers, governance turns into guesswork.

Nowhere is this more evident than in the government’s approach to defining the middle class. The new tax structure, which exempts income tax liability up to Rs. 12 lakh per annum, assumes a broad-based middle-income group, yet there is no consensus on who precisely falls within this category. The National Council of Applied Economic Research (NCAER) defines middle-class households as those earning between Rs.2 lakh and Rs.10 lakh annually, while the People Research on India’s Consumer Economy (PRICE) sets the range at Rs.5 lakh to Rs.30 lakh per household. The discrepancy is striking. If one were to rely on Pew Research Center’s findings, the middle class actually shrank by 32 million people in 2020, while the number of those classified as poor (earning $2 or less per day) surged by 75 million. Given these realities, the narrative of a tax relief-induced boost of middle-class consumption seems to rest on questionable assumptions. This absence of concrete data extends beyond taxation to employment and income trends. Economic relief through tax breaks only works when people actually have money to spend. The budget assumes that taxpayers will celebrate by rushing to the markets, wallets open and spirits high, but stagnant wages, job uncertainty, and rising costs of living could easily rain on that parade. Past budgets have made similar bets – 2019’s corporate tax cut from 30% to 22% was supposed to unleash private investment, but businesses largely held onto their cash reserves instead. If a direct corporate tax windfall didn’t spark economic activity, will personal tax reductions fare any better?

Then there’s the government’s solution to the employment crisis, which comes in the form of a grand internship scheme. The government’s internship scheme, announced last year with the intent of placing one crore youth in the top 500 companies, has already revealed fundamental flaws. The Rs. 5,000 monthly stipend proposed under the scheme is not only below market standards but also fails to consider the economic viability of internships as a means of employment generation. While well-intentioned, it assumes that young graduates can survive on an amount that barely covers urban transport costs, let alone rent or food. Most internships in the private sector already pay more, meaning that this initiative will likely only attract companies looking for cheap labour rather than genuinely investing in skill development.

Fiscal Deficit Reductions

Perhaps the real magic trick of this budget is its fiscal deficit target. The government has committed to shrinking the deficit from 4.8% to 4.4%, a commendable goal but one that rests on an ambitious disinvestment plan. The problem? India’s track record with disinvestment is as consistent as monsoon predictions. In 2023-24, the government missed its PSU divestment target by nearly 50%. Unless New Delhi can suddenly sell off state assets like a fire sale at a closing department store, this fiscal deficit target may just be another political mirage. If previous attempts to sell Air India, BPCL, and LIC stakes have been met with tepid investor interest, where exactly is this year’s disinvestment magic going to materialize from?

Conclusion: Reform or Rhetoric?

Government debt, the elephant in the room of modern economics, continues to provoke spirited debates about its repercussions, especially when it comes to fiscal consolidation. In the quest for fiscal consolidation, there are two main schools of thought: the austerity camp and the growth-first crowd. The austerity camp insists on cutting public spending and raising taxes to reduce the deficit, believing that the economy will eventually bounce back once the fiscal house is in order. This approach, however, can feel like putting out a fire with a garden hose draining public services and social benefits at the very moment they’re most needed. On the flip side, those advocating for growth-first strategies argue that economic growth is the best cure for government debt. This approach banks on the idea that the economy will grow faster than the debt burden, but it’s not without risk. If growth doesn’t materialize as expected, the debt could spiral out of control, leaving the government scrambling for another round of bailouts or tax hikes.

The repercussions of government debt are far-reaching. The Union Budget 2025 arrives at a time when the balancing act between economic growth and fiscal prudence has never been more critical. It also finds itself in a unique position because India has the potential to capitalise on a demographic wave that is young, tech-savvy, and increasingly entrepreneurial. 

Cicero’s quote remains a classic reminder of fiscal discipline, contrasting with the ambitious but unproven strategies in India’s 2025 budget: “The budget should be balanced, the treasury should be refilled, and the public debt should be reduced.“

However, at its core, Budget 2025-26 is more about rhetoric than real structural reform. It talks up tax cuts but will likely recoup them through indirect taxation. It promises fiscal discipline but has no clear roadmap to achieve it. If history is any guide, India’s growth story has always been propelled by bold, decisive reforms-not incremental adjustments. Right now, the government seems more interested in managing expectations than igniting a transformative economic shift. Perhaps the real question isn’t whether this budget is good or bad, but whether it truly matters at all. So, what’s the real takeaway? This budget is economically ambitious, politically savvy, and structurally imperfect, a point where capitalism meets nationalism meets electoral math.

The jury is still out on whether India can execute it without tripping over its own contradictions.

The world is watching. And so are India’s 142.86 crore citizens.

About the Author

Geetaali Malhotra is a 2nd year B.Sc.(Hons.) Economics student with a minor in International Affairs and Diplomacy. She is a writer and analyst specialising in Indian economic policy, financial markets, and political economy.

Image Source : Photo by Mathieu Stern on Unsplash