Budget 2025: Time to give artificial intelligence an extra push

As the Union Budget approaches, discussions inevitably turn to expectations—tax cuts, higher spending, fiscal consolidation, and structural reforms. But at its core, the Budget is a financial statement detailing the government’s annual receipts and expenditures, as mandated by Article 112 of the Constitution.

Budget’s origins in India date back to 1860 when James Wilson, a member of the British Viceroy’s Executive Council, presented the first budget for British India. Post-independence, the first Union Budget was presented by R.K. Shanmukham Chetty on November 26, 1947, primarily focused on addressing revenue imbalances and laying the foundation for economic planning.

Over the decades, the Budget has evolved from a colonial revenue exercise to a critical instrument of economic policymaking, used to drive growth, manage deficits, and implement welfare schemes. However, its role is often overstated—while it provides a roadmap for government finances, long-term economic transformation depends on broader policy decisions beyond a single annual statement.

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Irrespective of that, what should we expect from the budget? India’s fiscal consolidation trajectory remains on course, with the upcoming Union Budget expected to reaffirm the government’s commitment to prudent fiscal management. Over the past few years, fiscal marksmanship has improved, with a sharper focus on expenditure quality and disciplined deficit reduction. The fiscal deficit for 2024-25 is likely to be revised down, lower than the budgeted estimate, largely due to a shortfall in capital expenditure disbursal. For 2025-26, the government is expected to target a fiscal deficit slightly below 4.5 per cent of GDP, reinforcing its commitment to the glide path of bringing the deficit below 4.5 per cent.

Looking ahead, the emphasis will likely shift towards reducing the Centre’s debt-to-GDP ratio, with a medium-term target of bringing it down to 50 per cent of GDP. If achieved, this will pave the way for a further reduction in the fiscal deficit, ultimately strengthening India’s macroeconomic fundamentals. A sustained fiscal consolidation path, alongside structural reforms and targeted investments should also create room for an eventual sovereign rating upgrade.

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The government must continue prioritising capital expenditure in Budget 2025 to sustain economic momentum and counter the slowdown in investment. In the first eight months of FY25, capital expenditure contracted by (-)12.3 per cent, falling significantly short of the budgeted growth of 17.1 per cent. This led to weaker gross fixed capital formation (GFCF) growth, estimated at 6.4 per cent in FY25 compared to 9.0 per cent in FY24. Sectors such as manufacturing, mining, quarrying, and construction showed slower growth, further underlining the need for a public investment push. Given that the real GDP growth forecast for FY25 has been revised downward to 6.4 per cent, the government must counterbalance weak private investment by increasing capital expenditure by at least 20 per cent in FY26.

A well-calibrated push can lift public sector capital formation to 3.35 per cent of GDP, helping bridge infrastructure gaps and stimulating private sector participation. strong capital expenditure drive, particularly in transport infrastructure, logistics, and green energy, is essential to sustain India’s growth trajectory and meet medium-term fiscal goals. Without a significant public investment push, India risks stagnating at sub-6.5 per cent GDP growth, delaying its transition to a $5 trillion economy beyond 2028.

Another area could be tax reforms, both direct and indirect. The government should take a decisive step towards simplifying India’s direct tax structure by removing all exemptions and discontinuing the old tax regime. The coexistence of multiple tax regimes creates unnecessary complexity, reduces transparency, and distorts economic decision-making. The New Tax Regime (NTR) should be the sole framework, offering lower tax rates with a broader base. Estimates suggest that eliminating exemptions under the old tax regime and transitioning all taxpayers to the NTR would lead to a modest revenue loss of Rs 50,000 crore (0.14 per cent of GDP), but this can be offset by higher compliance and increased consumption.

A streamlined tax system, free from exemptions and deductions, would enhance efficiency, reduce litigation, and encourage voluntary compliance. Moreover, rationalising tax slabs—such as reducing the tax rate for incomes between Rs 10 and Rs 15 lakh from 20 per cent to 15 per cent**—**would provide a significant boost to disposable income, driving economic growth. Further, there are still some exemptions which can be claimed under NTR. They should be removed too, and effective net tax rate should be brought down.

In July 2024, Finance Minister Nirmala Sitharaman announced the government’s plan to introduce a new Direct Tax Code to replace the outdated Income Tax Act, 1961, with the aim of creating a simpler, transparent, and exemption-free tax regime. The coexistence of the old and new tax regimes has led to inefficiencies, and Budget 2025 presents an opportunity to eliminate all exemptions, phase out the old tax regime, and establish a single, lower tax rate framework to enhance compliance and economic activity. A structured transition, including gradual reductions in personal and corporate tax rates, simplified tax slabs, and improved dispute resolution mechanisms, would ensure a smoother implementation.

Further, on the indirect tax front, expanding faceless assessment to GST audits is a logical next step in India’s ongoing tax administration reforms, following the successful implementation of faceless assessments in income tax. A faceless GST audit system would eliminate direct interface between taxpayers and tax officers, significantly reducing discretion, potential harassment, and compliance costs, particularly for MSMEs that often struggle with procedural complexities. By leveraging technology and automation, faceless GST assessments can standardise decision-making, ensure uniformity in audits, and minimise the scope for arbitrary tax demands. This will also improve ease of doing business by allowing businesses to focus on growth rather than bureaucratic hurdles.

Moreover, integrating AI-driven risk assessment tools into faceless GST audits can help identify fraud while ensuring that genuine compliance errors do not lead to undue scrutiny. Given the success of e-invoicing, GSTN analytics, and AI-powered assessments, a faceless GST audit system would further enhance transparency, improve compliance efficiency, and build taxpayer confidence in India’s indirect tax regime.

Beyond fiscal and tax reforms, the Union Budget should prioritise increased allocations for research and development, education, healthcare, and artificial intelligence to drive long-term economic growth and global competitiveness. Enhanced investment in research and development is essential for fostering innovation, boosting industrial productivity, and strengthening India’s position in high-tech manufacturing and scientific research. In the education sector, higher budgetary support should focus on improving infrastructure, teacher training, digital learning resources, and skill development programs, particularly in emerging fields such as artificial intelligence, robotics, and quantum computing. Healthcare funding should be expanded to enhance public health infrastructure, strengthen primary and preventive care, and support medical research, ensuring greater accessibility and affordability of healthcare services.

Given the rapid advancements in artificial intelligence, the budget must allocate resources to AI-driven research, the development of indigenous AI models, and the integration of AI across sectors such as agriculture, healthcare, governance, and cybersecurity. Strategic investments in these critical areas will drive innovation and employment and position India as a global leader in technology, human capital development, and healthcare excellence.

Aditya Sinha (X:@adityasinha004) is a public policy professional. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.