As usual, the media is full of speculations about the budgetary proposals the Finance Minister will likely spell out in her at least 90 minutes, if not a full two-hour speech, on February 1, 2025. More than ordinary citizens whose immediate living, if not future, is more likely to be affected by the budget proposals, the creamy layers of the society, namely, investors in the capital markets, captains of the industry, and perhaps the media are the pro-active speculators. Of course, one cannot ignore the economic experts who patiently keep waiting the whole year for the day to display their analytical skills. Besides, the corporate affairs executives based in the capital eagerly wait for the moment to cross-check the effectiveness of their lobbying power on behalf of big business houses.
Whether the finance minister meets the expectations or not depends on an individual’s perception of the state of the economy and aspirations. However, the finance minister is supposed to frame the budget proposals considering the prevailing socio-economic situation apart from an attempt to paint a rosy future. In the present state of the economy and the Prime Minister’s vision, the following factors should not be missed while the finance minister unfolds the budget proposals for 2025-26.
Roadmap for Vikasit Bharat
Apart from responding to the prevailing economic situation, the government is expected to spell out the roadmap for emerging as the Vikasit Bharat by 2047. Similarly, fiscal measures are also required to become the third-largest economy in the world, surpassing Germany and France by 2027.
Without the support of the appropriate policy measures, especially accelerating overall economic growth, which in turn needs a strategy to improve the supply chain as well as strengthen the aggregate demand we simply cannot dream of becoming the Vikasit Bharat. These twin issues cannot be addressed without appropriate fiscal measures to incentivize the investors and simultaneously strengthen purchasing power in the hands of people.
Of course, the supply-side fiscal measures will not be complete without fiscal measures to ensure technological upgradation along with access to quality manpower, which is directly linked with quality education and the healthcare infrastructure.
Slowdown in Economic Growth
India continues to take pride in being the fastest-growing economy in the world. There is no doubt about the achievement in terms of comparative growth rates with other countries. However, there has been a slowdown of late as the economy is expected to end up with a 6.4% growth rate in 2024-25 after showing a remarkable performance at 8.2% growth in the previous year.
The current year’s growth rate will not only be lower than the original estimation of 7.2%, which was lowered to 6.5% by the government, but, it will be the worst performance since the pandemic. The slower growth rate is mainly attributed to weaker growth in fixed capital formation at 6.4% as compared to 9.0% last year.
Consumption Expenditure
Production is a function of demand. No manufacturer takes the risk of producing anything unless he is assured of demand for what he produces. Countries world over realized this hard fact during the pandemic-prompted economic crisis. In India too, both fiscal and monetary authorities went out of their way to incentivize the investors without any positive result.
Fortunately, India’s growth is domestic-demand-led, unlike export-led economies like China, Singapore or South Korea. When it comes to domestic demand, the rural market plays a significant role. Rural average monthly consumption spending per person increased by 9.3% to ₹4122 in 2023-24 from ₹3773 in 2022-23. It was hardly ₹1430 in 2011-12.
The gap between the average rural and urban expenditure also has been narrowing over the years. However, consumption expenditure by the top 5% of both rural and urban has declined by 3.5% and 2.5% respectively in 2023-24. Conversely, spending by the bottom 5% increased by 22.1% in rural and 18.7% in urban areas.
The above trend should provide adequate clues to the policymakers with regard to the fiscal strategy. Marginal propensity to consume is higher at a lower level of income. Obviously, the finance minister is supposed to focus on poorer and lower middle classes as any additional purchasing power going into their hands is more likely to get transformed into demand which is crucial at this stage.
External Markets
Ours is not an export-led economy. Still, 22.45% of the gross domestic products and services rely on external markets. As per the IMF, the overall global economy is expected to end up with 3.3% growth in 2025, as against a growth rate of 3.7% last year. When it comes to India’s major markets, such as the US, China, Eurozone, etc., none of them show a promising picture as there is likely a slowdown in the economy.
The US, of late, started showing marginal improvement with 3.1% expansion during the third quarter of 2024 as compared to 2.8% growth in the second quarter. This is certainly good news for Indian exporters as the US market supports around 18% of the total exports. However, with Donald Trump becoming the US president with an emphasis on an ‘America First’ approach, we have to keep our fingers crossed.
The weakening rupee may not be of any help in boosting exports. So maybe the fate of export incentives. The minimum the government can attempt at this stage is to take care of logistics and quality of products through appropriate fiscal measures which of course, requires support by the upgradation of trade-related infrastructure including innovative ideas such as GIFT and clearance processes.
Fiscal Deficit
The fiscal deficit situation is crucial for the economy as it affects different stakeholders, mainly the investors, and consumers, besides the government’s developmental strategy and welfare programs. The fiscal deficit target for 2024-25 is 4.9%, which is expected to improve to 4.5% of GDP in 2025-26. In this respect, there are both positive and negative developments.
When the government expected the fiscal deficit target at 4.9%, it was in anticipation of a 7.2% growth rate in GDP in 2024-25. With the GDP growth rate expected to be at 6.4%, fiscal deficit as a percentage of the former is likely to work out higher than 4.9%.
On the revenue mobilization side, however, there is an improvement in tax collections. The provisional figures of direct taxes for the financial year 2024-25 showed an increase of 22.19% as compared to the previous year. This is likely to have a positive impact on the fiscal deficit position. The correct position will be known only on the first of February.
Any worsening of the target of 4.9% is likely to have an adverse influence on the international rating agencies, which in turn will increase the interest rate burden of external commercial borrowings. Besides, any expansion in fiscal deficit means an increase in government borrowings and the resultant interest rate pressure.
Inflation
The consumer price index [CPI] eased to 5.22% in December 2024 as compared to 5.38% in the previous month mainly due to slower food inflation from 9.04% to 8.39%. Though the overall retail inflation is within the RBI band rate of 4%-6%, still it is above the comfortable level of below 4%.
It is equally important to know that the nature of inflation of late has been cost-push inflation which can be tackled through fiscal measures rather than monetary policy approach. Softening of inflation is crucial in order to strengthen the purchasing power of people which in turn helps in revival of the economy.
Therefore, when the budgetary proposals are assessed on the first of February, the analysts cannot afford to ignore these factors in terms of the response from the government.
(The Author is a former Member of the Prime Minister’s Economic Advisory Council; Views expressed are personal)
