RECOMMENDATIONS FOR BUDGET : 2025 - 2026

INTRODUCTION
1. In the next three years, India is expected to become the third largest economy in the World, with GDP of USD 5 trillion. However, the government has, set a higher goal of becoming a developed country by 2047. With the journey of reforms continuing, this goal is achievable. The reforms will be more purposeful and fruitful with the full participation of the State Governments. It will be more meaningful if the changes percolate down at the district, block and village levels in areas such as health, education, land and labour in which States have a big role to play. There is however, considerable scope for the growth rate to rise well above 7% by 2030, as the overall investment climate is increasingly becoming more favourable with sustained enhancement in the ease of doing business.

2. Surya Foundation Think Tank comprising a group of experts deliberated on various issues related to the forthcoming Union Budget 2025-26. Suggestions / Recommendations of the Think Tank are given in the succeeding paras.

RECOMMENDATIONS
MIDDLE INCOME TRAP
3. The middle-income trap occurs when an economy fails to transition from middle to high-income status and get stuck due to stagnant growth, lack of innovation and outdated economic models. To achieve high middleincome group status India’s per capita income has to go up to USD 14000 from USD 2700. Most of the low middle-income group economies namely Turkiye, Egypt and Brazil and many others languish in the middle-income trap. In order to avoid the middle-income trap, India need to more open to free trade and align itself with global value chains. Indian economy can not only bank upon domestic demand, it has to enhance the exports along

with taking measures to avoid increase inequality of every kind-income,
consumption, geography, wealth, gender and inheritance.

4. Fact is only three to four countries in the past hundred years have transformed themselves into developed nations- Japan in the 19th and 20th centuries, Taiwan and South Korea in the mid-20th Century and China in the 1990’s. The three markers for such transformation are, one is farm sector reforms, which would lead to higher rural surplus; the second is double-digit sustained growth in manufacturing, and the third is trade surplus for higher value added products.

5. Economy must invest, ensure the infusion of new global technologies and develop an environment conducive to domestic innovation.

EMPLOYMENT LINKED INCENTIVE SCHEME (ELI)
6. At present there is a disconnect between India’s booming economy and its stagnating job market. This could derail the India’s long-term economic aspirations. India’s demographic dividend, often highlighted as a critical driver of future growth, could turn into demographic liability if the country fails to generate sufficient employment opportunities. India has a short span of 15 years to reap benefits of demographic dividend and we should not loose the opportunity. An unemployed young population will lead to inequality and the social unrest which can potentially lead to an economic downturn.

7. Given the challenging employment scenario, the ELI scheme is a meaningful policy intervention. The ELI scheme’s targeted incentive could catalyse the dual objectives of industrial expansion and employment generation. There is a scope to consider for expanding the scheme to include sectors such as technology, healthcare and renewable energy, Skill development-industries that not only promise significant job creation but are also aligned with futuristic industries. Constant monitoring mechanism could be devised with necessary checks and balances to ensure that ELI scheme should create long term, stable employment instead of low wage, temporary positions. Large companies with greater hiring capacities and resources may be better positioned to take advantage of the incentive offered under the three newly announced Employment Linked Incentive schemes.

8. The main concerns are that job creation will concentrate in high hiring industries and regions and employers may prioritise quantity over quality, driving down wages. The others issues are exclusion of staffing agencies and refund of subsidy for short-term employment may discourage employer participation. There is a need to encompass mechanisms to redress the issue of job creation in specific sectors or regions. Based on the experience of its implementation Government may consider extending it on optional basis beyond top 500 companies.

PRODUCTION LINKED INCENTIVE (PLI) SCHEME
9. Expand the PLI Scheme beyond the 14 Sectors to interalia include small scale labour intensive sectors namely handicrafts, Leather and footwear, toys, kitchenware, gems and Jewellery and also cover Space sector.

WOMEN EMPOWERMENT
10. Special policy initiative need to be implemented with major focus to enhance Women participation in labour force, as India currently has the lowest female labour force participation rate at 32%, among the world’s top 10 economies.

CAPITAL SPENDING
11. Government accounts show that Capital Spending on public infrastructure projects by the Centre has shrunk 15% this year. Public Infra spends that have spearheaded growth in recent years need to lead the way. The Centre’s Rs 11.11 lakh crore Capex goal for the year acknowledges this, and it must now ramp up these spends to get closer to, if not entirely meet that target. The NITI Aayog should analyse/ study the kind of bottleneck in stepping up capital expenditure and suggest remedial measures.

12. Re-prioritisation of capital expenditure will help in directing more resources to sectors such as roads and railways, where the spending pace has been rapid. This might mean to cut in capital outlays for sectors that have failed to spend a large portion of the resources allocated to them. Capital Expenditure should continue to be the engine of growth for the economy. The forthcoming budget should enhance the allocation for capex.

CARBON BORDER ADJUSTMENT MECHANISM (CBAM)
13. The European Union (EU) CBAM designed to tax imports based on embedded carbon emissions will fully apply by 2026, to Steel, Cement, Aluminium, Electricity, Fertilizers and Hydrogen. The CBAM could cut India’s GDP by 0.12%. This burden will be heavy on Iron & Steel as 28% of India’s exports is to EU and it could fall by 2.7% by 2030. This unilateral measure effectively shifts the decarbonisation burden on to developing countries.

14. The strategy to manage CBAM should be :
Take feedback and identify barriers from affected industries. Create a domestic Carbon Credit trading scheme. Levy a Carbon tax on imports. Diversify the export market beyond the EU. To design a rebate mechanism for exporters particularly for Micro Small and Medium Enterprises. To exclude MSMEs from CBAM after negotiating with EU and UK. Press developed countries to fulfil their commitments on climate finance and technology transfers now going much beyond the earlier USD 100 billion annual climate finance goal. Push within the WTO for a Global Carbon pricing mechanism that is transparent, equitable and universally apply.

IMPORT DUTY ON STEEL
15. There is a dumping of finished Steel from China. To safeguard the interest of domestic steel manufacturers, basic custom duties need to be increased. Despite a consistent increase in steel inventory over the last two years, imports have continued to rise, it is displacing domestic players as it is affecting profit margin of the manufacturers and further it will disrupt the investment cycle. India- ASEAN, FTA’s is being used to route lower priced metal from China. Nearly 40% of China’s exports are to ASEAN’s countries, Korea & Japan which have FTA’s in place with India. As a result, these nations can potentially act as a pass through country for Chinese exports to India. In view of this, the basic custom duties should be increased to 15% from 7.5%. For immediate relief the safeguard duty should be levied.

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)
16. High cost of credit is the single biggest roadblock in the growth of 6.5 crore MSMEs which could range between 15% and 28% depending on the nature of financial institutions. Further policy measures to enhance their competitiveness could include steps to integrate them with international markets, digital support for global competitiveness (digital, AI Skilling) ease of doing business and easy availability of credit at affordable cost. Classification norms for NPAs should be enhanced to 180 days from the present 90 days.

JOB CREATION
17. Demography is a major factor in propelling the Indian Economy as the World’s fastest growing big economy. The median age is around 28 years and 63% of population is of working age. However, the labour force participation rate stood at 55.5% as per the last available data. This is due to falling labour intensity, as growth is led by services sector rather than manufacturing. Therefore while we are not experiencing jobless growth, more steps are needed to harness the demographic dividend.

18. An overall outlay of Rs 1.48 lakh crores has been allocated to create
41 million jobs for the youth over the next 5 years in the budget 2024-25.

There has been some concern about economic growth not fully translating into employment growth. India’s high youth unemployment is a structural threat to its long-term growth potential. To pick up the broader employment the government must do more, including filling lakhs of vacancies in its own ranks expeditiously.

19. The creation of jobs at present is limited due to insufficient demand, caused by low consumption and the lack of private investment. Jobs should not be created in top 500 companies only, which are largely capital intensive. Need to create jobs in MSME’s in labour intensive sectors, in small towns. Raising wages in MGNREGA will stimulate demand.

20. To create jobs, first and foremost is to continue with innovative reforms. Due to abundance of labour, capital led economic growth is not fully ideal. The reluctance of micro, small and medium enterprises, the backbone of employment, to grow in size and scale as well as that of large business houses to foray into labour intensive sectors can be attributed to the compliance burden and cost imposed by outdated labour laws. A via media needs to be found regarding implementation of labour codes by 2 to 3 States to break the logjam.

MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE
SCHEME (MGNREGS) ALLOCATION
21. For the financial year 2024-25 Rs 86,000 crore has been allocated to the MGNREGS. This may be Rs 26,000 crore more than last year’s allocation of Rs 60,000 crore, but it is still Rs 19,297 crore less than the scheme’s actual expenditure of Rs 1.05 lakh crore in the financial Year 2023-24. In the year 2024-25 allocation for the MGNREGS is just 1.78% of the budgetary allocation, a 10-year low in the scheme’s funding. The lower allocation artificially suppresses the demand for work under the scheme. The focus on MGNREGS must continue as it is demand based rural employment scheme.

22. MGNREGS needs to be streamlined by having :-
Greater diversification for permissible work Decentralised fund management

Review wage structure Adequate budget to ensure sufficient and continuous flow of funds Necessary checks and balances with the support of States to address leakages in Fund Management

EXPORTS
23. Trade is a critical growth engine and India’s global trade share does not match its economy’s size and it is yet to capitalise on the opportunity presented by China’s withdrawal from labour intensive production. India needs to relook to reduce tariffs, non-tariffs barrier as well as Foreign Direct Investment (FDI) curbs and rethink of the reluctance towards multilateral pacts such as Regional Comprehensive Economic Partnership (RCEP).

24. In Financial Year 2014, India’s GDP was USD 2010 billion with merchandise exports at USD 314 billion and manufacturing accounting for 15% of GDP. In 2024 GDP has grown to USD 3900 billion and exports reached USD 437 billion, but manufacturing’s share in GDP dropped to 13%. The shrinking role of manufacturing and its decreasing export contribution needs to be looked into. Inter-alia, issues are high input cost, complex labour laws and high logistic cost.

25. The high inputs cost are on account of high cost of raw material, energy and financing. Due to rigid labour laws companies can’t do layoffs and this comes as a hindrance to scale up. Both internal and shipping cost adds to logistic cost. The high cost and low ease of doing business also hurt labour intensive exports. All of which have been declining over the period.

26. The economic policy should focus on building efficient, product focused supplier chains that streamline raw material sourcing, production, logistic and customs clearance. Interest equalisation scheme on pre and post shipment benefit should be extended to services exporters.

27. Tea Exports : The existing conflict between Israel and Palestine spreading to other West Asian countries particularly to Iran, can get adversely impact tea export. Iran is one of the top buyers of Indian tea, further it will increase the logistic challenges. Tea export issues needs to be addressed by discussing with Tea Associations.

TRADE LINKS
28. The major way to deal with geopolitical situation and challenging external economic conditions is revisiting trade links that is free trade agreements (FTAs) including RCEP though it continues to be China centric. India already has trade agreements with almost all RCEP countries. Products made in those other countries will naturally have larger amounts of China value added. This will freeze out India. India must constantly re-evaluate its approach to trade agreements and other in progress deals such as those with the EU, UK including RCEP. FTAs should have clause for investment in India.

REAL EFFECTIVE EXCHANGE RATE (REER)
29. REER is a widely used measure of a currency’s value compared to its key trading partners. A value of above 100 indicates over valuation, and for the last decade, the rupee has hovered above this benchmark. According to the Reserve Bank of India’s REER index, the rupee stood at 5.5% above its fair value. However, in view of REER, slight deprecation of the rupee with in tolerance band, as it remains over valued against trading partners, could be considered.

AGRICULTURE
30. Agriculture is engaging nearly 46% of the workforce, it’s contribution to GDP is about 18%. If current growth trends continue this disparity will worsen. While overall GDP has grown at 6.1% annually since 1991-92, agricultural GDP lags at 3.3%. By 2047, agriculture’s share in GDP might shrink to 7-8%, yet it could still employ over 30% of the work force if significant structural changes are not implemented.

31. Several initiatives have been rolled out to bolster farmers prosperity and sustainable agricultural growth namely PM-KISAN SOIL HEALTH CARD SCHEME, promoting millets; agriculture infrastructure fund. Projections indicate that the total demand for food grains in 2047-48 will range from 402 million tons with production anticipated to exceed demand by 10-13% under the normal scenario as demand shifts away from food grains. However, to meet this new demand sustainability, significant investment in agriculture research, cold storages, supplychain infrastructure and policy support are required.

32. The States that have posted the highest agricultural growth in recent times are the ones shown to have diversified most into Livestock, Aqua and Horticulture farming sub-sectors.

33. Rationalisation of Agricultural Schemes : Recently 18 centrally sponsored agricultural schemes with a total allocation of Rs 101,321 Crore have been rationalised into two schemes namely; Pradhan Mantri Rashtriya Krishi Vikas Yojna and Krishonnati Yojna.

34. The rationalisation into two schemes will give more funding flexibility to the States to reallocate funds from one component to another based on their own needs and avoid duplication. The Central and State share is around 68 and 32 percentage respectively. Impact analysis of the rationalisation of the schemes should be done.

35. Scope of Minimum Support Price (MSP) : The facility of Minimum Support Price should be extended to vegetables, fruits and newly grown millets accompanied by a gradual shift away from staples like Wheat and Paddy. Pilots may be tried in select States.

36. Government may consider incentivising farmers to shift from growing selective crops, that they cultivate to claim support prices. In case of such selective crops, the government also has to step in to store the excess in warehouses where they end up rotting or attract pests such as rats. A subsidy not to farm selective crops not only addresses waste in the grain storage mechanism, but more importantly, it frees up support prices for a larger variety of crops that the country is deficit in. It will be an efficient alternative to MSP.

INFLATION
37. Excluding food prices from headline inflation will not depict the realistic picture of inflation and will impact the strategy of RBI to manage inflation. Inflation rate basket should represent the items consumed by the consumers. The weightage of food in overall consumer price inflation is at 46%, which was done in 2011-12 and RBI could consider it to bring it down to a more appropriate level. However, it is important to ensure that the headline inflation is aligned with the flexible inflation target of 4% with tolerance band of +/- 2%, allowing RBI to balance inflation with growth concerns.

PRIVATE INVESTMENTS IN INFRASTRUCTURE
38. Centre contributed 49% of total investments on infrastructure and State governments 29% leaving the balance to be covered by private sector. The Private sector is shying away because of the massive capital requirements, market risks experienced due to delay in completion of projects which impacts returns and gestation period. These issues/ concerns needs to be addressed by having discussion with private sector investors for crowding in private investment in Infrastructure sectors.

DISINVESTMENT
39. At present the government owns 389 public sector enterprises and its holding in these enterprises is valued over Rs 44 Lakh Crore with the stake of around 67% on an average basis. Out of 389 enterprises if government reduces its stake to 33% from 67% in the top 50 PSU’s it will fetched them around Rs 52 Lakh Crore at the current price to book of these companies.

40. To begin with by reducing its holding in the well performing enterprises in top thirteen companies to 51%, the government will get Rs 2.9 Lakh Crore and taking it down to 33% will fetch Rs. 5.7 Lakh Crore. These proceeds could be used for debt reduction, capex funding and eco growth. An institutionalised mechanism could be developed for scrips to disinvest and across what time frame to have transparency in the disinvestment system.

LEGISLATION ON GIG WORKERS
41. As the labour code on gig workers has been delayed by the States. The way out is to have a separate bill which will offer social security benefits to gig workers in India. As a part of social responsibility the companies operating in gig economy should be ask to allocate part of their revenues says 0.5% to 1.5% to fund some of these- social security benefits. At present about 10 Million gig workers are in India out of 550 million plus labour force. This is likely to keep growing and be one of the biggest sources of employment generation in the country. The key issue is to recognise the employment relationship in gig work.

ECONOMIC NATIONALISM
42. Adopt economic nationalism that is pragmatic and starts delivering results in few years. Have sector specific pragmatic policies, which evolve and are calibrated. Use of tariff and non-tariff barriers plus support for domestic firms to help them gain market share in India and globally. Even FDI from China could be considered on selective basis. Import of capital from China is better than import of goods. Any import substitution must look at cost. Expensive import substitution is not to be advantage of any body. Need efficient import substitution.

CLIMATE GOALS
43. India’s international commitment, the major ones being the reduction of emission intensity of GDP by 45% by 2030 compared to 2005 levels, and achieving net Zero Greenhouse gas emissions by 2070. It is estimated that India will need an average annual funding of USD 100 billion between 2021 and 2030 to finance its mitigation plan, while current investments are only USD 44 billion- leaving a huge gap. A major proportion of this investment would need to come from the private sector, given the government’s fiscal constraints and limited support from development financial institutions and multilateral development banks for these activities. For raising sizeable debt in rupee terms to meet the climate finance requirement through foreign fund inflows requires developing the domestic bond market, which currently lacks sufficient depth and liquidity, as well as deepening the currency hedging market and reducing costs.

44. The government’s top priority should be to establish an unambiguous taxonomy defining green investments. The taxonomy should be aimed at attracting institutional investors with a view to incentivising private investment in green projects, the Government may consider offering credit guarantees for debt raising, reducing withholding tax for foreign investors and providing tax concessions. Also consider adopting a climate budgeting model similar to the established gender budgeting.

45. Transition to a low carbon economy should be done in a calibrated and systematic manner so that to avoid destabilising effects on the financial systems especially after the President elect of US approach towards climate goals. Govt may come out with the roadmap/white paper on climate goals.

UNIFIED LAND CODE
46. Land is a key factor of production and an important building block of the economy. Creating a land database and digitising it is an important land reform that will help both industry and agriculture. There is a need for a unified land code that can substitute and/or subsume various land laws. The seven sub rules reiterated by Supreme Court for acquisition of land needs to be considered while framing the unified land code.

HEALTHCARE SYSTEM
47. Budgetary allocation in the budget 2024-25 for the Healthcare System is up 12.6% from last year including allocation for the public insurance scheme, Ayushman Bharat. In view of this, there is an urgent need to step pace of setting up teaching hospitals in every district to ensure a steady flow of trained doctors and nurses to service the healthcare system and provide access to basic healthcare across the country. Affordability, Access and Quality must be three pillars built at the same pace for India to be Viksit on the healthcare front. India’s public expenditure on healthcare is only 2.1% of GDP. It needs to be gradually increased to 6%.

EDUCATION POLICY
48. National Education Policy suggests that our investment on education should be at least 6% of our GDP from 3% at present. This could be enhanced gradually to 6%. Implement the higher education Segment of the National Education Policy after taking States on board. 49. Government should consider having a digital Skilling for Children under a Central Government Scheme.

SKILL TRAINING
50. India must make a coordinated effort to reform and rebrand Vocational Skill training besides aligning education with the job market, to leverage its demographic advantage to meet its USD 5 Trillion Economy target. Efforts are needed towards rebranding skill education so that Students do not run to conventional streams like arts, commerce or STEM (Science, technology, engineering, and mathematics). Market linked Skill development will help India reach its Job growth potential by changing its employment landscape.

INDO PACIFIC ECONOMIC FRAMEWORK (IPEF)
51. The IPEF consisting of 14 members including India has got four pillars viz. Pillar I - Trade, Pillar II - Supply Chain Resilience, Pillar III - Clean Economic Stability and Pillar IV - Fair Economy. Beyond these four pillars, there is an overarching administrative agreement to establish a high level political oversight framework at the ministerial level over the various four pillars while setting general guidance and goals and guiding leader’s vision and mandate for IPEF. At present India has joined all the pillars except the one on Trade (Pillar I). The aim of IPEF is to strengthen economic engagement and cooperation among partner’s countries to advance growth, economic stability and prosperity in the region.

52. The IPEF negotiations have been mostly been conducted in secrecy with limited public input and it raises concerns if the member countries including India, are able to protect their key interest specially relating to tax policy, export restrictions and other related issues. A roadmap could be announced to join (Pillar I) that is trade related issues along with consequential impact. However, the President elect of US may not be interested in IPEF and hence we need to have a cautious approach.

LATERAL ENTRY
53. A lateral entry system is good for economy as it injects new energy, new ideas via people who come with a different mind-set and experience from professional civil servants. It will improve governance and policy making to facilitate so that India can perform better. To manage resistance against lateral entry there is need to create jobs in private sectors especially in manufacturing. Further, various assignments can be outsourced to consultants instead of through lateral entry.

EVALUATION OF CENTRALLY SPONSORED PROGRAMMES
54. The Centre currently runs around 37 centrally sponsored programmes, which are aimed at boosting economic and social sector outcomes in the areas such as guaranteed rural employment, rural roads, housing, irrigation, health and agriculture. To look into inefficient spending issue there is need for evaluation of schemes. Under various schemes the fundsharing pattern between the Centre and States is 60:40; 50:50 and entirely funded by Centre. The evaluation should take into consideration the ratio of funding; the achievement of goals and leakages.

WELFARE SCHEMES<
55. Freebies may be smart politics and certainly help parties get immediate gains, but they exemplify bad economics. All political parties are competing with each other on freebies. Scare fiscal resources are being diverted from investments that could be beneficial to the poor in the long, to boost short-term consumption, which does nothing to solve the larger systemic problem of inequality. The 15th Finance commission report has rightly sounded a note of caution on this issue. The only way to start a process of rectification is to take the route of an overhaul of India’s fiscal federalism framework.

ELECTORAL BOND (EB) SCHEME
56. Donations were made to political parties through electoral bonds on the basis of laws enacted by Parliament. To bring transparency and check the generation of black money the EB’s with required checks and balances should be brought again through Parliamentary legislation.

TAX DEVOLUTION
57. As GST is consumption-based tax, it favours consuming States and not producing States such as Gujarat, Karnataka, Maharashtra, Tamil Nadu & others. Further, the restriction on States by GST divisible pool of taxes to 41% and the amount the Centre can collect as cesses and surcharges which is beyond the ambit of devolution should be looked into by 16th Finance Commission to amend the tax devolution framework that will lead to greater autonomy to the States to have a truly federal and participatory government model. Any additional devolution should only be to the 3rd Tier and conditional on States implementing devolution of funds and functionaries to local governments.

58. At present, there are five slabs under GST structure including exemption slab, need to have a uniform rate. Petrol and diesel should be brought under GST ambit under appropriate slab.

SOLAR PANELS
59. To incentivise domestic manufacturing of Solar panels and manage global competition we need to derisk the investment by inviting bids for a longer period say 10 years. Further land and other inputs namely power etc should be offered at economical cost. Levy safeguard duty and price support to give due protection to domestic suppliers as these measures are WTO compatible. The solar panels could be used under PM Roof Top Solar Scheme and KUSUM programs including in Govt funded buildings and campuses.

RETROSPECTIVE TAXATION
60. Retrospective taxation powers for mineral bearing States is against the cannon of certainty. Income tax is a key consideration in investment decisions. The retrospective taxation will hurt investor’s confidence and won’t have any positive impact on States economy. States must keep their competitive edge in mind before they decide to implement the Supreme Court decision.

INCOME TAX ACT REVIEW
61. Following the budget announcement in the July 2024, Central Board of Direct Taxes have set up an internal committee for a comprehensive review of the six decade old direct tax law and to make it concise, lucid, easy to read & understand and mitigation of litigation. The exercise is not to write a new tax law or a Tax Code rather to remove the outdated clauses and make the law concise by having around 100 pages. The revised futuristic act should be at par with the income tax acts of developed countries and reduce transaction cost.

RAILWAY REFORMS
62. Reduce the dependence on gross budgetary support and/or borrowings from the Central government and also reduce the operating ratio from the present 98.26.

63. The freight segment is profitable whereas the passenger segment makes huge losses. Recent data shows that there was a loss of Rs 68269 crore in passenger services, with all the profit from freight tariff nullified in cross subsidizing. The annual growth in freight volume and revenue stands at 1% and 3% respectively while the economy grew at 7%. There is a need to rationalise the fare and freight structure.

64. Inadequacies in railway safety system should be addressed on priority basis. Importance has not been given to upgrading the signalling and telecommunications network as well as human resources development.

CONCLUSION
65. Indian economy has shown remarkable resilience in the face of global geopolitical challenges and is poised for steady growth. An above average monsoon in most parts of India will lead to strong agricultural growth, enhancing the rural economy through rural spending. It will complement the performance of industry and services sectors. Recently announced employment linked incentive scheme will increase labour demand and job creation. However, the government should continue with ease of doing business reforms.

66. Due to inward looking import tariff policy of US President elect Trump, we need to have a strategy to manage it and also assess the impact on trade links with China after resetting of economic ties subsequent to disengagement along border with China.