Finance Minister Nirmala Sitharaman says some states need to get their acts together on finances

A: In the last three or four years, we have continuously engaged [with income tax payers]... and to ensure that their trust in the government is intact, we have taken several steps. In every Budget clear steps have been taken towards giving the sense that we respect taxpayers. And this is a continuation of that effort. I don’t deny that this is going to have a collateral [impact] in terms of consumption, in savings. Taxpayers are all over the country, not just in urban areas, and this is a continuation of Prime Minister Modi’s effort to respect the service that taxpayers are doing in nation building.

Q: Beyond direct tax, does the onus now shift to the GST (Goods and Services Tax) Council to reform and give us a GST 3.0 that addresses some of the anomalies?

A: To be fair to the GST Council and the ministers who are a part of it, the work on rationalising and simplifying GST rates had commenced nearly three years ago. Even before the last GST meet in Rajasthan (in December 2024), quite an extensive amount of work had already been completed. I had spoken to the ministers to tell them that I need to have a bit more in-depth look at it, because we are going to discuss how to reduce the rate of items that are in the common man’s list for everyday consumption. For me, it was also important that we don’t lose an opportunity to bring down the number of rates, which was also the original intent. Work has got to happen on that, and I hope the GST Council will decide on it soon.

Q: Are you confident that you are close to some kind of consensus in the GST Council?

A: Every item has been scrutinised by the GST Council. You may not hear state finance ministers on the media speaking in favour of or on behalf of the GST Council, but that doesn’t mean that there is a discordant note. Consensus prevails on every decision in the GST Council. That said, data is released of how if an item under the GST is taxed at a certain rate it will still be lesser than the pre-GST rate and be revenue neutral. You wouldn’t be earning more than what you earned before, nor would you be charging more than what you charged before the GST was introduced.

On an average, across the board, goods and service are taxed at 11.23%. What does this simply mean? That goods and services are taxed lesser than what they can be ideally, which is 15.23%. GST has actually reduced the rate below what it was before its introduction.

Q: Are you planning to make the new tax regime so sweet that the entire taxpaying population shifts to it and are you planning to announce the sunset of the old tax regime?

A: I want India’s tax system, on the whole, to be simple for compliance reasons, for the rates that are levied on people. Therefore, it’s not as if I’m going to sweeten the new regime, but keep the old regime going only in spite. The system has to be simplified and that is why we brought in the new regime. A new income tax code will replace the old one, which has been in operation since 1961 and has had so many additions to it. I am not saying the additions are violative or in contradiction of the original intent, but they have been added as India was going through changes as well. So, the language is being tinkered with at different times, and it has actually become a tome, so bulky. And anyone who has to comply with it has to look at a page here, a page there and so on. What this new Bill is going to do is to simplify it all, make it just straightforward. There is no interpretative confusion. Courts don’t have to spend time interpreting them. The change is being carried out with that intent.

Q: On the employment generation scheme announced last year, the allocation has risen to `20,000 crore in this year’s Budget. How confident are you that this scheme is going to work? What outcomes will this outlay yield in terms of the new employment generation?

A: A total of five schemes were announced in the July Budget. Between then and February, you are hardly talking about five, six months, and most schemes, inclusive of the internship scheme, have all picked up very well. Now, it’s a question of making people aware that this scheme is running. People can happily come and enroll. It is rolling on and we need to have more awareness.

Q: Why couldn’t the government spend the entire amount allocated for capex?

A: [Capex] continues. Our capex numbers have not come down. As much as `11.11 lakh crore from the Budget Estimates in FY25 has gone up to `11.21 lakh crore. Actual spending is lesser [because] it was an election year. The entire first quarter and I would even say a part of second quarter [was taken up]…For an amount like that to be spent between Centre and states does take time. We’ll probably catch up with a better number in the fourth quarter before March 31. But the reason is obvious and is there for all of us to see, that the elections did slow down capital expenditure. However, we have not cut it down. On the contrary, it’s 10% more than the Revised Estimates.

Q: On saturation, is there a question on the absorptive capacity of the Indian economy to deal with the capex outlay? And there are concerns about India Inc. not doing enough to invest back in the India story, despite your significant reductions in corporate taxes.

A: Which are those big ministries that have huge capex? We have not reduced anything. In fact, on the contrary, we have increased their allocation. Railways, roadways, defence, and home, they are all creating assets and they are big spenders. Home, because you see the vibrant villages in the border, border roads. Defence has its own asset building. Railways and roadways have not even exhausted 50% of all their large plans. So, this narrative that there isn’t enough absorption capacity is completely wrong. There’s enough and more work to do on capex, at least in these four ministries, and they’re big spenders. But if you’re talking about the private sector, in our engagement we’ve also highlighted the fact that many of them are probably sitting with passive investments, earning interest out of it. They can always look at newer capacity building, but they are making a commercial decision as to when the market would be ready for their additional investment. After a point, I cannot speak to them about it.

Q: How critical is the global impetus for India’s growth?

A: That’s something that we will have to watch. You can’t speculate on it even though you’re watching it. But, at this time, I would prepare myself for two things. One, the fallout of [tariff] actions already announced on China or Canada or Mexico, although some of them, like the one on Mexico, have been deferred by a month. We’ll have to see how that is going to impact India indirectly. Of course, we are keeping a watch and also being prepared in some ways. But what exactly is going to be the direct impact on India is something that I can’t speculate on.

Q: Did you have US President Donald Trump’s criticism of India in terms of tariffs in mind while preparing the Budget? Custom duties have been reduced on big motorcycles, and there are changes in the nuclear law…

A: Well, on the customs duty, I have said in the past that India cannot afford to have high tariffs. But even as we want our MSMEs to grow, if they need to import critical minerals, which we don’t have in this country, if they need some intermediary products, which we cannot produce in this country, I need to look at [how] basic customs duty (BCD) is burdening them and I need to remove it. Also, there was a lot of evergreening of duties. Anti-dumping duty imposed 30 years ago, 25 years ago, are being repeated. Even if we have had capacities within the country and didn’t need that kind of protection. I’ve clearly announced that eight rates were already removed, I am removing seven in this Budget and only eight more are pending. The rationalisation has been happening since 2022.

It is not just for the US, these measures are for any other developed country that wants to have some trade with us. We also have a conflicting situation where we have free trade agreements (FTAs) with some countries because of which there is duty-free import of the same commodity on which you have levied a huge BCD, preventing other countries from exporting to India. We had to clean all this up and that’s what has happened in this Budget.

Q: Why is the growth target for next year at 6.3-6.8%? PM Modi’s ambition of a Viksit Bharat by 2047 requires real GDP growth of more than 8%. Do we risk not reaching that target?

A: Yes, you can always point out, as though it is a ceteris paribus otherwise… [like] it’s a lab-like situation. No, you’re dealing with an ever-changing global scenario. Containers are not available; oil exports are going to be speculated upon; you also have oil from the Middle East coming back; you have America probably going into shale; there are [questions about] the relationship between Canada and US; Russia is also facing more sanctions. These are very serious matters that can have a bearing on India. Our oil imports, movement of goods, the impact of China being put under tariff and sanctions by the US, the excess capacity that is sitting in the Chinese economy that is not finding a market in the developed countries, will they go about dumping it in India?

Therefore, when you’re looking at predictions just keeping Indian factors in mind, it is one thing…But there are things that are happening, several things happening simultaneously, all of which are adding to the downside risks. You need to have realistic growth numbers.

Q: On the nature of the slowdown in growth…

A: Even when our fundamentals are strong and when our currency is strong as opposed to all other currencies, just in relation to dollar, we suffer because of the dollar’s peculiarity. And that is not the situation just for the rupee, it is about every other currency. Now if your currency is fine and fit except for this volatility with the dollar, can it be so if your fundamentals are weak? Can it be so if there are systemic problems? It cannot be. India cannot be the fastest growing major economy continuously for three successive years, and the World Bank predicts that will continue next year too, if systemic problems are grinding us to a halt.

Q: The government speaks about India being the third largest economy. But the per capita income is not something that we can boast about. What are your thoughts on that?

A: When we take an indicator, we should understand that as much proudly as we speak about the demographic dividend that India can have because of its population, we need to widen the pie that much more and grow faster for per capita income also to match up that level. You can’t keep telling me, but your GDP has to grow. But why is this? They are all interlinked. I cannot aspire to have a per capita income much better than less populous countries. These are hard realities.

Q: One of the notable things about Budgets under your charge is that, despite everything, you have maintained fiscal consolidation. Are you disappointed that international rating agencies are not taking that into account?

A: The fiscal deficit number for the coming year, financial year 2025-26, is 4.4% because that’s the glide path we have given ourselves. Capital expenditure makes up for 4.3% of our GDP. If my fiscal deficit is almost the same as my public expenditure to the GDP on capital assets, what does it say?

Under PM Modi we have focussed on fiscal prudence, maintaining discipline, transparency, but also the quality of public expenditure. If it’s matching with your fiscal deficit, it means you’re borrowing only to spend on capital expenditure, creating assets. We are not spending money to service our loans or to pay salaries. That is a major point.

I would think despite Covid, when we had to borrow money, we have shown fiscal discipline without cutting down on social welfare schemes and without cutting down on public expenditure in capital assets.

I would think that observers of the Indian economy, whether they are accredited rating agencies or anybody else, should look at this.

Q: A recent ranking by the NITI Aayog suggests certain states are slipping on economic performance. What would you say in this regard?

A: Well, I think this has been said at Centre and state talks. I wouldn’t want to comment on it in a public platform, considering that when it comes to certain matters of national interest, one does not speak with a political motive. India’s development, fiscal situation, debt-to-GDP ratio, effective spending on capital expenditure, these are matters for all of us to be equally worried about. Unfortunately, some of our states will have to introspect and get their act together.

Q: Most market experts cheered the Budget, but foreign investors have been continuously pulling out money. Why do you think that is happening?

A: India’s market and its fundamentals are strong. The domestic situation and issues arising out of it alone cannot be the reason for FPIs pulling money out of this country. Developments in the US, global uncertainties, markets like Japan trying to assert themselves… so many things are happening that FPIs will move as quickly as mercury would do. I’m not surprised but equally I would want to make India a lot more attractive destination for investment and that is one of the reasons why in the Budget I have mentioned that bilateral investment treaties will be reviewed and we will come up with a new template.

Q: Suddenly political parties are announcing schemes for women to win elections. Who is going to foot the bill?

A: Give as much as you want in the name of whatever freebie, but I won’t classify them as freebies as long as that money is accounted for in the Budget. We know of states that have made promises and won elections and after that do everything to implement the programme and then say they are left with no money. You won the election, you gave the promise, but Modi has got to pay for it. If you thought you can just pull it off like that and then keep blaming Prime Minister Modi, it’s unfair. Look at Karnataka, the state from where I am an MP. I feel really bad. Till two years ago, three years ago, it was one of the best-governed states. You had industry coming, start-ups were thriving, and it was the best ecosystem. Today, the state has a revenue deficit.