Introduction:
India stands at a critical juncture: rapid technological change (especially AI), climate imperatives, global volatility, and rising inequality all demand a rethinking of policy. The Union Budget 2025–26 and associated reforms provide a roadmap that attempts to balance growth, inclusion, and sustainability. This article analyses those reforms, along with structural issues in MSMEs, startups, digital finance, rural economy, and inclusive growth, with a focus on challenges and policy choices ahead.

Budget 2025–26: Key Highlights & Strategic Shifts:
● Macro targets and fiscal framework
● Total expenditure for 2025–26 is pegged at ₹50,65,345 crore, a 7.4 % increase over revised 2024–25.
● Revenue receipts (excluding borrowings) are estimated at ₹34,96,409 crore, up ~11.1 %.
● Borrowing is planned at ₹15,68,936 crore, essentially flat relative to revised estimates.
● Fiscal deficit is targeted at 4.4 % of GDP, down from 4.8 % (revised) in 2024–25.
● Revenue deficit is <= 1.5 % of GDP, reflecting modest compression of non-capital spending.
● The government is aiming for nominal GDP growth of 10.1 % (i.e. real growth + inflation) for 2025–26.

Thus, the budget reflects a calibrated fiscal consolidation: moderate deficit reduction, stable borrowing, and emphasis on capital expenditure.

Capex, Infrastructure & Private Participation:
● Capital expenditure is budgeted to grow by 10.1 %, outpacing revenue expenditure (6.7 % growth)
● The allocation to infrastructure sectors is ~₹11.21 lakh crore (central and state combined emphasis) to support the vision of “Viksit Bharat 2047.”
● To encourage participation of the private sector, policy tweaks such as viability gap funding, risk sharing, and concessional financing are expected.

This push in capex is central to the growth strategy: leveraging public investment to catalyse private investment, crowd in resources, create jobs, and build backbone for long-term productivity gains.

Union Budget Reforms & Structural Measures:
● Emphasis areas in the budget speech include boosting manufacturing / Make in India, supporting MSMEs, inclusive growth, agriculture and rural resilience, employment-led development, innovation & digital economy.
● A National Manufacturing Mission has been announced to give renewed impetus to industrial growth.
● In tax policy, the budget provides relief to “middle class” via adjustments in personal income tax slabs, aiming to boost consumption.
● Disinvestment target is set at ₹47,000 crore, slightly lower than previous years, reflecting a cautious approach in selling government stakes.
● The government has also reserved ₹1,50,000 crore in special interest-free loans to states for capital expenditure, promoting cooperative federalism in infrastructure growth.

These structural reforms are aimed at giving fresh momentum to the “Atmanirbhar Bharat 2.0” model — by strengthening manufacturing, deepening the MSME base, promoting private investment, and enhancing growth inclusivity.

Key Thematic Issues & Policy Deep Dive:
1. FRBM 2.0 – The New Fiscal Compact:

The existing Fiscal Responsibility & Budget Management (FRBM) Act prescribes ceilings on fiscal parameters. With evolving macro challenges, the need to rethink or rework fiscal rules (i.e. “FRBM 2.0”) is widely debated. Some key considerations:

● Flexibility vs Discipline: A rigid rule might undercut fiscal space during downturns or emergencies. FRBM 2.0 must incorporate escape clauses, cyclical adjustments, and countercyclical buffers.

● Transition from Deficit to Debt Targets: The government has signalled a shift from focusing purely on fiscal deficit to debt-to-GDP ratio as the anchor from 2026–27 onwards, aiming to reduce the debt ratio from ~57 % to 50 % by 2030–31.

● Inclusion of Green / SDG Investment: The rules should allow higher spending on climate, health, education — sectors with long-run returns — without being penalised.

● Transparency, Accountability & Escape Provisions: Enforce better reporting, independent evaluation, and credible escape clauses coupled with clear triggers.

Thus, FRBM 2.0 must reconcile the twin imperatives of fiscal prudence and countercyclical flexibility to deal with uncertainty in a volatile world.

2. GST Reforms & “GST 2.0”:
● The concept of “GST 2.0” involves recalibrating tax slabs, rationalising rates, improving compliance, and widening the base.

● In the recent reform, some tax rates were reduced across various sectors, causing estimated revenue shortfall (~₹93,000 crore), balanced partially by introducing a new 40 % GST slab expected to bring ~₹45,000 crore. Net loss is ~₹48,000 crore.

● The reasoning is to stimulate consumption, especially household demand, which in turn fuels growth. The multiplier effect is estimated at ~₹1.98 lakh crore in aggregate demand.

● Challenges: managing revenue volatility, aligning compensation to states, reducing litigations and classification ambiguities, and improving technology (e.g. e-invoicing, data analytics) for compliance.

GST 2.0 is a bold experiment to re-balance indirect tax structure; success depends on strong enforcement, predictable rates, and reconciliation between centre–state interests.

3. Startups, Deep Tech & Technology-Led Growth:
● India has ~120 unicorns worth over USD 354 billion and more than 32,000 startups, with ~2,000 new ones each year.

● Around 50 % of startups are emerging from tier-II / tier-III cities, highlighting the rapid spread beyond major metros.

● Government support continues via schemes like the revamped Design Link Incentive (DLI), especially in semiconductors and hardware areas.

● In the post-AI economy, startups and deep tech firms will face both opportunity and disruption. Automation, AI, large language models, etc., may render many low-skill jobs obsolete; startups in AI, robotics, biotech, agri-tech, and climate tech become key drivers of future employment and productivity.


Policy suggestions:
● Strengthen public–private incubators, seed funding, infrastructure (test labs, proof-of-concept centers).

● Create risk capital / venture funding corridors, tax incentives for R&D, and easier exit regimes.

● Promote innovation clusters in semi-urban / rural regions to prevent geo-concentration.

● Continuous skilling/reskilling platforms to help the workforce adapt in an AI era.

4. MSMEs & Employment in the Post-AI Economy:
● MSMEs are pillars of employment and local value chains. But they face structural constraints like access to credit, scale, technology, and market access.

● The government has introduced the RAMP (Raising and Accelerating MSME Performance) scheme to boost MSME growth and productivity.

● Post-AI, many routine MSME tasks (bookkeeping, inventory, predictive maintenance) could be automated. This may displace certain jobs but offer efficiency gains.

● The challenge is job polarisation: high-skill jobs (AI programming, data science, advanced manufacturing) may expand, while low-skill tasks shrink.

● Policy imperatives:
1. Promote adoption of AI / automation among MSMEs via subsidies, shared labs, and clusters.
2. Encourage upskilling to shift workers to supervisory, maintenance, and analytics roles.
3. Provide credit and risk capital for MSMEs to scale and absorb technology.
4. Use public procurement to favour MSMEs and encourage them to adopt certified standards, digital platforms, etc.

Thus, the survival and growth of MSMEs in the AI-era depend on structural transformation, not just relief packages.

5. Green Bonds, Sustainable Finance & Climate Resilience:
● Green, social, sustainability-linked debt (GSS+) has rapidly grown in India; the sustainable debt universe has already crossed ~USD 55.9 billion.

● The challenge of India is the large green capital gap (estimated around USD 11 trillion) required to meet its climate pledges (say, under NDCs).

● Green bonds are an important instrument to channel private finance into climate and sustainability projects (renewables, clean transport, waste, water, adaptation infrastructure).

● Key policy enablers:
1. Standardisation of green bond taxonomy, certification, and verification.
2. Incentives such as tax breaks, credit enhancement, guarantees, and partial risk coverage.
3. Strengthen project pipelines in states and sectors, especially in rural areas (e.g. solar microgrids, climate-resilient agriculture).
4. Encourage blended finance models combining public, private, and philanthropic capital.

Green bonds can be a key tool to reconcile growth with ecological constraints and could find a formal role in FRBM 2.0.

6. Digital Rupee, Crypto Regulation & Digital Finance:
● The Digital Rupee (e-Rupee / Central Bank Digital Currency – CBDC) is among central banks’ experiments globally. India is in advanced stages of pilot / rollout.

● CBDC offers benefits: lower transaction costs, financial inclusion, precise monetary policy transmission, reduced black economy, and programmable money.

● But challenges remain: privacy, cybersecurity, impact on banking systems (disintermediation), digital divide in access, interoperability with private wallets.

● On crypto regulation, India is charting a cautious path: potentially treating crypto as a regulated financial asset or security, with AML/KYC rules, transaction taxes, capital gains oversight, banning/limiting speculative use.

● In the 2025–26 context, digital payments infrastructure, UPI, tokenisation, and wallets all complement CBDC and digital finance goals.

Prudent regulation of CBDC and crypto will define the integrity and stability of India’s evolving digital financial ecosystem.

7. Rural Economy, Agri-Reforms & Inclusive Growth:
● Agriculture and rural sectors remain critical for livelihoods, food security, and social stability.

● The 2025–26 budget allocates more for Rural Development and Jal Shakti ministries.

● To enhance rural prosperity: better irrigation, farm mechanisation, agri-markets, value addition, extension, and climate adaptation measures.

● Reforms are needed in land leasing laws, contract farming, market access, warehousing, cold chains, crop insurance, and crop diversification.

● Inclusive growth requires rethinking measurement, too: moving beyond headcount poverty to multidimensional indices, incorporating inequality metrics (Gini, Palma), and accounting for underemployment, asset gaps, consumption inequality.

India’s growth trajectory must be not just high but equitable — eliminating extreme poverty and curbing inequalities in outcome and opportunity.

8. Income Inequality & Poverty Reforms:
● Inequality in India persists in consumption, assets, human capital, and opportunity.

● The budget’s social sector allocations, education, health, and rural schemes aim to reduce it.

● But measurement reforms are imperative: integrate multidimensional poverty index (MPI), promote household surveys with better granularity, monitor wealth, and asset distribution.

● Taxation must play a role: more progressive direct taxes, curbing tax evasion, wealth taxes, or inheritance taxes deliberation.

● Social safety nets must be strengthened — not just subsidies, but skill transfers, health coverage, universal basic services, targeted guaranteed employment (e.g. MGNREGS).

Only a growth model that marries prosperity and fairness can sustain social legitimacy.

9. Inflation & RBI Policy:
● India faces inflationary pressures from global commodity shocks, supply chain disruptions, monsoon variability, and currency fluctuation.

● RBI’s monetary policy must calibrate between controlling inflation and supporting growth — especially in a slowing global environment.

● Tools include interest rate adjustments, liquidity management (OMO, LAF), and macroprudential measures.

● Coordination between fiscal and monetary policy is crucial: fiscal restraint aids inflation anchoring, while over-tightness could choke growth.

10. Employment Challenges in a Changing Era:
● India’s demographic dividend can become a burden if jobs lag skill growth.
● The formal sector is still too small; the informal sector is vulnerable to automation.
● In a post-AI economy, job creation must focus on knowledge, services, green jobs, health, care economy, rural non-farm sectors, gig economy, etc.
● Policy levers: skills development (PMKVY, higher education reforms), incentivising labour-intensive industries, ease of doing business, social security for gig / micro workers, start-up/job linkages.

11. Atmanirbhar Bharat 2.0, Manufacturing & PLI Schemes:
● The government’s push via Production-Linked Incentive (PLI) schemes has aimed to galvanise manufacturing in key sectors (electronics, auto, pharma, etc.) as part of “Make in India.”

● In Budget 2025–26, new incentives and exemptions in capital goods, LED TV, textile looms, and EV components are introduced to deepen domestic value chains.

● To ensure “Atmanirbhar Bharat 2.0” is scalable, policy must address supply chain constraints, critical minerals, logistics, power, R&D, quality certification, and global competitiveness

Critical Appraisal: Risks, Trade-offs & Road Ahead:
1. Revenue risks and fiscal rigidity:
● The tax bases (especially corporate and GST) are vulnerable to economic slowdown. Thus, higher collection projections may not materialise.
● Capital expenditure is more discretionary, so budgeted capex may be undershot, weakening multiplier effect.

2. Debt sustainability & interest burden:
● Interest payments already constitute ~25 % of expenditure.
● Over time, rolling over debt amid rising rates may crowd out productive capital spending.

3. Implementation bottlenecks:
● States’ capacity, land acquisition, environmental clearances, project delays, and weak contract enforcement can hamper infrastructure targets.
● MSMEs and startups often suffer from regulatory burden, lack of managerial capacity, and access to technology and markets.

4. Inequality of access & digital divide:
● If digital finance, AI, and infrastructure remain concentrated in urban regions, rural and marginalized areas may lag further, widening disparities.
● Inclusive growth demands that policy actively bridge access gaps in internet, finance, and education.

5. Global headwinds & external vulnerabilities:
● In an environment of rising protectionism, currency fluctuation, commodity shocks, India’s external account, export competitiveness, and inflation are under risk.
● Capital flows can be volatile; thus, macroprudential vigilance and external buffers (FX reserves) are essential.

6. Technological disruption:
● AI and automation may displace certain categories of jobs — especially low-skill service and manufacturing tasks — before new ones can absorb displaced labour.
● Reskilling is necessary, but scaling it effectively is a major challenge.

7. Climate shocks and fiscal pressures:
● Extreme weather events, floods, and droughts can impose fiscal and developmental burdens. Infrastructure built without climate resilience may be vulnerable.

Conclusion & Key Policy Roadmap:
India’s 2025–26 budget is ambitious and balanced. It attempts to reign in deficits, boost capex, stimulate private investment, and promote inclusive growth. Yet the success of this plan depends not just on numbers but on execution, flexibility, institutional reforms, and resilience to shocks.

A suggested policy roadmap:
1. Implement FRBM 2.0 with built-in flexibility, debt anchors, and escape clauses.

2. Strengthen GST 2.0 architecture — enforce compliance, rationalise slabs, anchor revenue stability.

3. Deepen MSME / startup ecosystem via capital, tech adoption, incubation, market linkages, skill upgradation.

4. Expand green finance instruments (green bonds, sustainability-linked loans) and integrate them within fiscal rules.

5. Roll out Digital Rupee with safeguards and co-existence with private digital finance; regulate crypto carefully.

6. Elevate rural growth & agri reforms — land markets, contract farming, value chains, climate resilience.

7. Focus on inclusive growth metrics — adopt multidimensional poverty indices, strengthen social sector spending, and progressive taxation.

8. Anticipate AI disruptions — scale reskilling, promote sectors of future jobs, and ensure social protection for transition.

9. Monitor macro stability — calibrate monetary policy, manage debt, guard external balances.

10. Strengthen governance and capacity at state and local levels for efficient implementation and accountability.

For UPSC / MPSC, this thematic sweep helps you answer questions such as “Critically examine Budget 2025 in the light of inclusive growth,” or “Discuss the role of MSMEs in employment in the age of AI,” or “Examine the challenges of green finance and sustainable development through the lens of India’s policy framework.”