Finance Minister Nirmala Sitaraman is expected to present the eighth consecutive Union Budget on 1st February 2025 for FY 2025-26. With recent developments in the Indian macroeconomic landscape and the global geopolitical scenario, this term has become significant. As the precursor of the Budget 2025, India’s economy exhibits a mix of strengths and challenges.

Insights on Indian economic health-

On the positive side, India’s CAD (Current Account Deficit) for Q2 of 2024-25 stands at $11.2 billion, 1.2% of the GDP from $11.3 billion or 1.3% of GDP a year ago; however, it is expected to bloat to 2.5% -2.7% of GDP in the current quarter owing to the record high trade deficit in November. For FY 25 CAD may stand at 1.1%-1.2% of GDP compared to the 2% of FY 24. The tourism industry shows promise, contributing 6.5% of the GDP and supporting 4.3 crore jobs in 2023. In 2024 it shows optimism by an expanding middle class and a 9% growth in travel spending. The urban-rural gap in Monthly Per Capita Consumption Expenditure has declined to 70% in 2023-24 from 71% in 2022-23 indicating sustained consumption growth in rural areas.

On the negative side, India’s GDP growth slowed for the third consecutive quarter. Gross Value-added growth for manufacturing dropped to 2.15% from 14.3% in September last quarter. Inflation has weakened the rupee value. India’s inflation rate for October shot up to 6.2% well above RBI’s upper tolerance level of 6%. It moderated down to 5.5% in November, but the RBI maintained the interest rate at 6.5%. Demands for consumer goods among urban Indians are slowing down, poorer rural areas are outpacing the consumption growth of urban areas. There is a decrease in the issuance of credit cards by Indian banks to maintain optimal credit-deposit ratio.

Moreover, Trump’s induction as the US President and his rhetoric of increased tariffs for India has raised serious concern among his Indian counterparts. Other geopolitical tensions like the Israel-Palestine and Russia-Ukraine conflict make the scenario stressful.

Expectations from Budget-

Economists expect the government to emphasize the need for fiscal consolidation. The Reserve Bank of India has highlighted the importance of maintaining good fiscal health and the finance minister in her last budget speech focused attention on the need to bring down the debt levels sustainably.

According to Sakshi Gupta economist at the HDFC bank, the slowdown in growth had several reasons. The slowed momentum of capital expenditure for the General Assembly election in 2024 has been one of the major reasons. The momentum is yet to pick up at the tail end of FY25.

“When we talk about capital expenditure, I think it is not just fair to concentrate on infrastructure spending which includes spending on roads railways etc. But we must start looking at broader definitions of capital expenditure encompassing social welfare schemes like health, education, climate, skilling, employment generation etc. All these are going to lead to the increased growth rate.”

Start-ups and SMBs are expected to benefit from enhanced credit accessibility and simplified tax procedure measures to foster job creation. Healthcare and education are expected to receive increased preference.

Increasing rural consumption and food security is the other top priority considering the climate emergencies of recent times. The rural income in India has shown upward trends in the last 18 months. Increasing the wage of MGNREGA, and payouts of PMKY will increase the rural income of households consequently raising rural consumption.

Tax simplification is expected to increase disposable income which will in return drive up the consumption demand. In 2024 with the Finance Bill, there were major changes brought in to simplify the capital gain tax by removing the differential rates for various classes of assets, moreover, there is ease of compliance such as computation, filing, and maintenance of records. Experts are also predicting the inclusion of petrol and diesel in the ambit of Goods and Services Tax.

Middle-class taxpayers would be looking at the budget expecting tax relief for individuals earning up to Rs 15 lakh- Rs 20 lakh, this will, in turn, boost the disposable income and buoyancy of consumption. Reduction of excise duties on petrol and diesel is also expected to boost disposable income and further contribute to demand.  

The banking sector proposed to introduce tax incentives for Fixed Deposits. Average savings in fixed deposits have reduced over the years. Tax incentives in fixed deposits will increase their appeal. The financial sector requested measures to boost the efficiency of capital markets and wider accessibility for capital market inclusion. There was also a recommendation to incentivize long-term savings in both debt and equity, to help boost investor participation.

Considering the post-US election trade volatility, Deloitte India highlights that the Indian government should focus on tariff rationalization, duty exemption, other rationalization and simpler compliance to enhance export competitiveness and reach the target of $2 trillion by 2030.