Until 1991, the union budgets used to evoke a lot of excitement for the wrong reasons. Given the prevailing license-permit-quota raj and oppressive government control of economic activity, tinkering with excise and customs duties used to be the favourite pastime of finance ministers. Enormous profits accrued through manipulation of duties to favoured business houses, and fair market competition was generally absent.

A budget is nothing but a statement of accounts and should be an unspectacular, boring exercise. Mercifully, the Union budget for FY 2025-26 is indeed largely predictable and marks continuity in policy. In the face of global headwinds and decentralisation of growth, the finance minister did a commendable job. Impressive fiscal discipline has been maintained, with the deficit brought down to 4.8% in the current year (RE) and estimated at 4.4% in the next financial year. The union debt, as a share of GDP, continues to decline. Capital expenditure continues to break records for a third year in succession. Out of the ₹48.33 trillion total revenues (tax + non-tax), ₹25.60 trillion, an impressive 53%, will be transferred to states and union territories in some form or other in FY 2025-26. All this has been accomplished while keeping those with an annual income of ₹12 lakhs or below fully exempted from the income tax. Among large economies, which are not solely dependent on mineral extraction and commodity sales, this, perhaps, is the most generous personal income tax regime for middle-income people. Just to compare, in purchasing power terms, a US dollar is roughly equal to ₹20. An income of ₹12 lakh in India roughly equals $60,000 in the US. Income tax rates in the US are 10% for income up to $11,600, 12% up to $47,150 and 22% above that! Some economists are worried that the shrinking direct tax base may not be a sound idea in the long term. But the salaried classes are happy. After all, a budget is a political document too, and the government being sensitive to electoral calculations is perfectly understandable.

The FM checked all the boxes: agricultural supply chains, pulses and cotton production, MSMEs, labour-intensive industries, ease of doing business, etc. A finance minister is not a magician; she can only work with the tools she has. All in all, it is a fiscally responsible, growth-promoting budget. And yet, a lot more remains to be done to promote high growth in the long term. There are three numbers that signify the structural challenges of our economy. First, about 85-90% of the workers are still in unorganised, informal sector with low skills, low productivity and low wages. Second, 65% of the people are still rural in an era in which urbanisation, modernisation and economic growth are synonymous. Even if we assume a higher level of urbanisation based on satellite imagery, it is undeniable that our level of urbanisation is the lowest among G20 countries. And third, even now 46% of our workers depend on agriculture as the primary source of livelihood. The number actually increased in the post-COVID period. These are monumental challenges that cannot be addressed by the budgetary process alone.

If we are to achieve a reasonable level of prosperity to be regarded as a developed nation by 2050, we need a sustained high growth of 8% or more per annum. True, even at about 6.5%, we are the fastest growing economy among large economies. We probably can maintain at least a 5% growth rate for a couple of decades unless a catastrophe strikes us. But there is a huge difference in outcomes between a growth rate of 5% and 8%. If we estimate our current GDP as US $4 trillion, with an 8% growth rate, we will double our GDP to $8 trillion in 9 years by 2034. But with a 5% growth rate, our GDP in 2034 will only be $6.2 trillion. The difference is an annual production loss of $1.8 trillion, or ₹150 trillion! That will be roughly ₹1,00,000 loss in per capita income. If we assume that the tax-GDP ratio at all levels put together is 20%, this loss of GDP amounts to a loss of revenue of ₹30 trillion annually; if that revenue is available, governments can vastly improve services, increase welfare and invest more in infrastructure and growth promotion. It is these sustained rates of 8% that China has achieved for about three decades, transforming the economy and reshaping the world.

We can no longer use ‘democracy’ as the alibi for our under performance. When we get our act together, we are able to build national highways, ports, airports and railways rapidly. China did well not because of autocracy, but because they had a sound policy and competent execution. Their political recruitment is of high calibre, and competent, experienced, rational, tested leadership ascends to the top. They focused on quality education and skills, and health care. They removed all impediments in land and labour markets. Their local governments are strong and well-funded, accounting for half of public expenditure. They started at the grassroots, and built upwards, from bicycles, wrist-watches, garments, toys and sewing machines to smart phones, electric vehicles, solar panels, battery storage, rapid transport, and now Al. We would do well to go back to basics, emulate China, and release the animal spirits.

The author is the founder of Lok Satta movement and Foundation for Democratic Reforms. Email: drjploksatta@gmail.com / Twitter @jp_loksatta