- India’s growth rate at a four-year low – Will FM go big on spending?
- The fiscal deficit target remains intact, but can it be stretched further?
- The RBI’s dividend windfall may fuel capex without derailing fiscal goals.
- Rate cuts, tax sops, and capex focus – Can they reignite India’s economy?
A Record-Breaking Budget: What’s at Stake?
When FM Nirmala Sitharaman takes the podium on February 1 to present the Union Budget for a record eighth time, the question on everyone’s mind will be: Will she go gangbusters to inject life back into India’s slowing economy?
India’s growth has slowed to 5.4% in Q2 of the current fiscal, with GDP growth for FY25 projected to drop to 6.4%, a four-year low. As India’s economic slowdown takes center stage, the expectations for Budget 2025 are high. Will the government respond with aggressive measures, or stick to its guns on fiscal consolidation?
Capex Push: A Proven Playbook
The Modi government’s capex strategy—pumping money into physical infrastructure like roads, railways, and bridges—has worked wonders in the past. This focus on creating physical assets was crucial in lifting India’s economy out of the COVID-19-induced downturn.
Despite the pressures, the government managed to keep its fiscal consolidation roadmap intact, earning praise from international rating agencies. But will this successful capex formula continue to dominate, or will there be a shift towards more direct fiscal interventions?
Fiscal Consolidation vs. Big Spending: Can the Path Diverge?
While many economists argue for relaxing the fiscal deficit glide path and focusing heavily on spending to accelerate growth, the government is unlikely to depart from its fiscal consolidation targets.
The 4.5% fiscal deficit target for FY25 remains firmly in sight, and the government is expected to exceed its deficit target for the current year, thanks to lower-than-expected capex spending.
But with RBI’s bumper dividend expected to boost the government’s coffers, Sitharaman may find room for more capex while maintaining fiscal prudence.
Tax Sops and Rate Cuts: A Double Whammy for Growth?
India’s economic momentum has been struggling, with slowing consumption being a major hurdle. To counter this, tax sops are likely to be part of the budget mix, aimed at boosting disposable income for consumers.
Furthermore, after the Budget announcement, the RBI, under new leadership, is expected to cut rates by 25 basis points. This would add a much-needed boost to the economy.
The capex push, tax incentives, and rate cuts could provide a perfect storm of growth drivers, helping to trigger a boom in private investments and lift corporate credit growth.
Facing Global Trade Challenges: Will India Rethink Its Tariffs?
With the ongoing US-China trade tensions, the government is considering changes to India’s tariff regime. US President Donald Trump has repeatedly threatened tit-for-tat levies, and India may need to recalibrate its trade policies to protect domestic manufacturing and trade interests.
Global Trade Research Initiative (GTRI) has suggested that India’s average import duty be reduced to 10% to help stimulate domestic production. It believes customs duties are no longer the key revenue pillar and should be re-evaluated as a strategic tool to support India’s manufacturing sector and expand global trade.
The Bottom Line: Can Budget 2025 Be the Catalyst for India’s Recovery?
With India facing significant economic challenges, the pressure is on FM Nirmala Sitharaman to deliver a budget that balances growth stimulation with fiscal discipline. Whether it’s through aggressive capex, tax sops, or strategic tariff reforms, Budget 2025 has the potential to be a game-changer.
The global economy, domestic economic slowdown, and political challenges will all play a role in shaping the final budget strategy. Can Sitharaman take bold enough steps to kickstart India’s growth engine and secure the country’s economic future? The answer lies just a few days away.
