01 FEB 2025
Critical Analysis of Shortcomings in the Indian Budget 2025-26
While the Union Budget 2025-26 aims to simplify taxation, boost economic growth, and incentivize digital finance, it has several shortcomings in areas like tax revenue sustainability, infrastructure funding, AI & tech investment, and global competitiveness.
1. Shortcomings in Tax Reforms: Sustainability & Revenue Loss
Issue: Revenue Loss from Direct Tax Cuts
The new income tax regime provides relief to the middle class but results in a revenue loss of nearly ₹1 lakh crore ($12 billion). This puts pressure on government spending for infrastructure, healthcare, and AI R&D.
Example & Comparison with USA, UK, and China
| Country | Tax Reforms in Recent Budgets | Revenue Impact |
|---|---|---|
| India (2025-26) | Lowered tax rates for middle class | ₹1 lakh crore loss ($12B) |
| USA (2024-25) | Higher corporate taxes on billionaires & Big Tech | Revenue gain of $300B over 10 years |
| UK (2024-25) | Increased corporate tax from 19% to 25% | Additional £17B per year ($21.5B) |
| China (2024-25) | Focus on tax rebates for manufacturing & AI R&D | Boosts GDP via industrial growth |
🔴 Criticism for India: Unlike the USA & UK, which focus on corporate tax hikes & progressive taxation, India’s budget focuses on personal tax cuts, which may not drive economic growth long-term. China’s strategy of offering sector-specific tax rebates (e.g., AI & semiconductors) is more targeted and growth-oriented.
2. Weak Allocation for AI Research & Development
Issue: Insufficient AI Investment Compared to Global Competitors
While India’s budget has some incentives for digital finance and UPI expansion, AI research remains largely underfunded.
Comparison of AI R&D Budgets
| Country | AI R&D Budget (2025) | Focus Areas |
|---|---|---|
| India | ₹10,000 crore ($1.2B) | Startups & digital finance |
| USA | $32B+ | AI defense, healthcare, and chips |
| UK | £10B ($12.6B) | AI ethics, security, & quantum computing |
| China | $50B+ | AI chips, robotics, & smart infrastructure |
🔴 Criticism for India:
- AI Budget is only $1.2B, while the USA & China are investing 30-50 times more in AI R&D.
- India lacks a dedicated AI policy for industrial growth, whereas China has a “Made in China 2025” plan to dominate AI.
- The UK budget prioritizes AI ethics and governance, ensuring responsible AI development, which India neglects.
✅ Solution: India should introduce an AI National Mission with funding similar to PLI (Production Linked Incentive) schemes for semiconductors and digital finance.
3. Infrastructure & Manufacturing Shortcomings
Issue: Lower Infrastructure Investment than China & USA
India’s budget allocates ₹11 lakh crore ($133B) for infrastructure, but this remains lower than China’s $2.5 trillion annual infrastructure spending.
| Country | Infrastructure Budget (2025-26) | Focus Areas |
|---|---|---|
| India | $133B | Roads, Railways, Airports |
| USA | $1.2T (Biden’s Infrastructure Plan) | Green energy, EVs, AI-powered roads |
| China | $2.5T | High-speed rail, AI-based urban planning |
🔴 Criticism for India:
- India’s infrastructure spending is nearly 20x lower than China, slowing industrial growth.
- No AI-based smart city development plan, while China is building AI-driven urban centers.
- USA’s green energy push (EVs & clean energy infra) is absent in India’s budget.
✅ Solution: India should increase AI-powered infrastructure spending and focus on smart city development to compete with China.
4. Lack of Startup & MSME-Friendly Taxation
Issue: Startups & MSMEs Still Face High Compliance Burden
- India’s budget provides tax incentives for startups, but GST compliance & regulatory bottlenecks remain high.
- Corporate tax for MSMEs is still 22%, whereas the UK provides a 19% rate for SMEs.
Comparison: Startup & MSME Tax Policies
| Country | Startup/SME Tax Rate | Other Benefits |
|---|---|---|
| India | 22% | Startup incentives for firms under ₹50 crore revenue |
| USA | 21% | Tax credits for R&D investments |
| UK | 19% | Lower tax rate for small businesses |
| China | 15% | AI startup grants & lower corporate tax |
🔴 Criticism for India:
- No direct AI startup grants like China’s model.
- Higher tax burden on MSMEs compared to UK & China.
- USA offers R&D tax credits, which India lacks.
✅ Solution: India should introduce AI R&D tax credits and reduce MSME tax rates to match global best practices.
Observation: India’s Budget is Growth-Focused but Lacks AI & R&D Investments
While the Indian Budget 2025-26 has good tax reliefs and infrastructure investments, it has major shortcomings in AI, startup incentives, and long-term revenue generation.
Final Scorecard (Comparison with USA, UK, and China)
| Category | India | USA | UK | China |
|---|---|---|---|---|
| Income Tax Reforms | ✅ Moderate | ✅ Progressive | ✅ Balanced | ✅ Targeted |
| AI Research Budget | 🔴 Weak ($1.2B) | ✅ Strong ($32B) | ✅ Balanced ($12.6B) | 🟢 Superior ($50B) |
| Corporate & MSME Tax | 🔴 High (22%) | ✅ Competitive (21%) | ✅ Favorable (19%) | 🟢 Low (15%) |
| Startup Incentives | 🟠 Partial | ✅ AI R&D tax credits | ✅ SME-friendly | 🟢 Grants & AI focus |
| Infrastructure Spending | 🔴 Low ($133B) | ✅ High ($1.2T) | ✅ Balanced | 🟢 Dominant ($2.5T) |
Key Takeaways
✅ Good tax relief for middle class
✅ Strong infrastructure push
🔴 AI R&D underfunded (only $1.2B vs China’s $50B)
🔴 MSME taxes remain high (22% vs UK’s 19%)
🔴 Lack of AI startup incentives & direct grants
Final Verdict: 🚨 India needs to increase AI & R&D investments and align its policies with global best practices to remain competitive.
Read more:
- A Comprehensive Analysis of Union Budget 2025-26
- Tax Reforms & Financial Sector Reforms: Budget 2025-26 (Union of India)
