<p>India’s economy recently experienced a slowdown owing to a combination of seasonal and geopolitical factors. While India remains the fastest-growing major economy globally, growth dropped to 6% in the first half of FY25, compared to 8.2% in the same period of the previous fiscal year. While there was a base effect impact, election uncertainties, rain-induced disruption in activities, and geopolitical uncertainties weighed on investments and exports.</p>.<p>Consumption spending also showed signs of fatigue as demand from middle-class households was hurt by inflation and stagnant wages amidst weak employment. Recognising the importance of these components, the Union Budget 2025 has introduced several measures aimed at reviving economic growth. The budget has aimed to address inflation and employment challenges, boost consumption of the middle-income segment, and keep fiscal deficit under check.</p>.<p>Private consumption — a critical component of India’s domestic demand — has faced significant challenges in recent times. The strain on disposable income caused by inflation and wage stagnation had to be addressed because its unsustainable growth has been impacting even investments, leading to reduced manufacturing and lower business activity. To tackle this, the budget has introduced a multi-pronged approach to boost consumption.</p>.<p>Key initiatives are designed to increase disposable income, ease inflationary pressures, and boost employment. Enhanced agricultural production has been targeted through measures to improve post-harvest management and reduce food inflation, particularly in pulses and vegetables. Targeted initiatives such as the National Mission on Pulses will ensure a steady supply and stabilise prices. Lower food prices will not only stabilise household budgets but also enhance purchasing power, encouraging consumers to spend more on other goods and services.</p>.<p>Additionally, a significant increase in the nil-tax slab to Rs 12 lakh will provide a major boost to disposable income, especially for the youth who have a higher income elasticity and are more likely to spend their income. This increased disposable income is expected to drive consumption growth, stimulating demand across sectors, including manufacturing and services.</p>.<p>The budget also announced measures to support MSMEs, especially in labour-intensive sectors like footwear, leather, toys, and food processing expected to generate significant employment and income opportunities.</p>.<p>MSMEs account for 45% of total exports; so, missions such as Bharat Trade Net, a digital platform designed to simplify trade processes, would reduce transaction costs and facilitate access to financing for exporters. This initiative will streamline exports and position India as a globally competitive player. The fiscal policy announcements underscore the importance of staying the course in ensuring economic stability. Fiscal deficit is a key indicator closely monitored by global investors, serving as a measure of a country’s financial health and giving investors the confidence of secure capital. A reduced deficit ensures that debt remains on a declining trajectory as a percentage of GDP.</p>.<p><strong>Rocky road to stability</strong></p>.<p>India has made significant progress on the fiscal consolidation roadmap outlined in FY22, with the fiscal deficit projected to be 4.4% of GDP in FY26. While the country has effectively reduced the fiscal deficit from 9.2% of GDP in FY2021 to 4.8% in FY2025, it still lags behind emerging peers like Vietnam and Indonesia. To outcompete these nations, India must ensure that borrowings are effectively utilised to stimulate economic growth, ensuring that borrowings translate into tangible economic progress. The net borrowings are estimated to stand at Rs 11.54 trillion in FY26, with a focus on reducing exposure to external debt.</p>.<p>However, there were expectations of a higher capital expenditure allocation. While the government has continued to emphasise on capex, with a 10.1% increase, allocating Rs 11.2 trillion for FY26, an allocation slowdown from the past few years is visible. That said, the emphasis has now shifted towards enabling states to take the lead in infrastructure development. The Finance Minister announced a Rs 1.5 lakh-crore outlay for 50-year interest-free loans to states for capital expenditure and infrastructure projects, empowering them to develop infrastructure tailored to their needs.</p>.<p>Each infrastructure-related ministry has been tasked with developing a three-year implementation roadmap under the PPP model, indicating a push for more private players in the infrastructure segment. This increases the scope for higher private capex spending going forward. These announcements are especially important in the context of rising global uncertainties. By strengthening the domestic economy and fostering a robust internal market, India will be better equipped to weather external shocks and enhance its economic resilience. This approach is crucial in driving India towards building a strong, inclusive economy capable of sustaining growth and improving the standard of living for all its citizens – a truly Viksit Bharat.</p>.<p>(Rumki is Economist at Deloitte India)</p>
<p>India’s economy recently experienced a slowdown owing to a combination of seasonal and geopolitical factors. While India remains the fastest-growing major economy globally, growth dropped to 6% in the first half of FY25, compared to 8.2% in the same period of the previous fiscal year. While there was a base effect impact, election uncertainties, rain-induced disruption in activities, and geopolitical uncertainties weighed on investments and exports.</p>.<p>Consumption spending also showed signs of fatigue as demand from middle-class households was hurt by inflation and stagnant wages amidst weak employment. Recognising the importance of these components, the Union Budget 2025 has introduced several measures aimed at reviving economic growth. The budget has aimed to address inflation and employment challenges, boost consumption of the middle-income segment, and keep fiscal deficit under check.</p>.<p>Private consumption — a critical component of India’s domestic demand — has faced significant challenges in recent times. The strain on disposable income caused by inflation and wage stagnation had to be addressed because its unsustainable growth has been impacting even investments, leading to reduced manufacturing and lower business activity. To tackle this, the budget has introduced a multi-pronged approach to boost consumption.</p>.<p>Key initiatives are designed to increase disposable income, ease inflationary pressures, and boost employment. Enhanced agricultural production has been targeted through measures to improve post-harvest management and reduce food inflation, particularly in pulses and vegetables. Targeted initiatives such as the National Mission on Pulses will ensure a steady supply and stabilise prices. Lower food prices will not only stabilise household budgets but also enhance purchasing power, encouraging consumers to spend more on other goods and services.</p>.<p>Additionally, a significant increase in the nil-tax slab to Rs 12 lakh will provide a major boost to disposable income, especially for the youth who have a higher income elasticity and are more likely to spend their income. This increased disposable income is expected to drive consumption growth, stimulating demand across sectors, including manufacturing and services.</p>.<p>The budget also announced measures to support MSMEs, especially in labour-intensive sectors like footwear, leather, toys, and food processing expected to generate significant employment and income opportunities.</p>.<p>MSMEs account for 45% of total exports; so, missions such as Bharat Trade Net, a digital platform designed to simplify trade processes, would reduce transaction costs and facilitate access to financing for exporters. This initiative will streamline exports and position India as a globally competitive player. The fiscal policy announcements underscore the importance of staying the course in ensuring economic stability. Fiscal deficit is a key indicator closely monitored by global investors, serving as a measure of a country’s financial health and giving investors the confidence of secure capital. A reduced deficit ensures that debt remains on a declining trajectory as a percentage of GDP.</p>.<p><strong>Rocky road to stability</strong></p>.<p>India has made significant progress on the fiscal consolidation roadmap outlined in FY22, with the fiscal deficit projected to be 4.4% of GDP in FY26. While the country has effectively reduced the fiscal deficit from 9.2% of GDP in FY2021 to 4.8% in FY2025, it still lags behind emerging peers like Vietnam and Indonesia. To outcompete these nations, India must ensure that borrowings are effectively utilised to stimulate economic growth, ensuring that borrowings translate into tangible economic progress. The net borrowings are estimated to stand at Rs 11.54 trillion in FY26, with a focus on reducing exposure to external debt.</p>.<p>However, there were expectations of a higher capital expenditure allocation. While the government has continued to emphasise on capex, with a 10.1% increase, allocating Rs 11.2 trillion for FY26, an allocation slowdown from the past few years is visible. That said, the emphasis has now shifted towards enabling states to take the lead in infrastructure development. The Finance Minister announced a Rs 1.5 lakh-crore outlay for 50-year interest-free loans to states for capital expenditure and infrastructure projects, empowering them to develop infrastructure tailored to their needs.</p>.<p>Each infrastructure-related ministry has been tasked with developing a three-year implementation roadmap under the PPP model, indicating a push for more private players in the infrastructure segment. This increases the scope for higher private capex spending going forward. These announcements are especially important in the context of rising global uncertainties. By strengthening the domestic economy and fostering a robust internal market, India will be better equipped to weather external shocks and enhance its economic resilience. This approach is crucial in driving India towards building a strong, inclusive economy capable of sustaining growth and improving the standard of living for all its citizens – a truly Viksit Bharat.</p>.<p>(Rumki is Economist at Deloitte India)</p>
