Corporate tax cuts in 2019, personal income tax changes in Union Budget 2025-26, and GST rationalization have constrained government finances.
Estimated revenue loss from corporate tax cuts is approximately ₹1.45 lakh crore, and from income tax changes, around ₹1 lakh crore.
The Centre's net tax revenues have slightly increased from 7.2% of GDP in 2014-15 to a budgeted 7.9% in 2025-26.
PM-Kisan allocation decreased relatively from 0.30% of GDP in 2020-21 to 0.18% in 2025-26.
Detailed Insights:
Lower tax regime driven by ideological, political, or economic factors has led to constrained budget allocations for both central and state governments.
States are reducing spending in other sectors to accommodate cash transfer schemes, indicating financial constraints and limited fiscal space.
Changes to MGNREGA (now V2-G RAM G) funding, requiring states to cover 40% of costs, will further limit states' fiscal flexibility.
The long-term nature of these revenue constraints implies that both current and future governments will face limitations unless significant economic growth occurs.
The 16th Finance Commission's recommendations and the Pay Commission award will further influence the division of resources and fixed government expenditures.
Key Concepts Involved:
Fiscal Consolidation: Government strategy to reduce deficits and debt accumulation.
Revenue Forgone: The amount of revenue a government loses due to tax exemptions, deductions, or lower tax rates.
Competitive Populism: Political scenario where parties compete to offer populist schemes, potentially straining public finances.