Union Budget 2025: Needs to cut tax rates, focus on domestic drivers to boost growth: EY

EY's chief policy advisor D K Srivastava said since urban consumption is lagging, it is necessary to rationalize the personal income taxes structure, both in terms of rates and deductions such that additional disposable incomes could be put into the hands of lower and middle income class groups.

New Delhi: The forthcoming Budget needs to focus on domestic drivers like reducing personal income tax and allocating higher capex, to boost growth amid global economic uncertainties, EY's chief policy advisor D K Srivastava has said.

Srivastava, a member of the Advisory Council of the 16th Finance Commission, said since urban consumption is lagging, it is necessary to rationalize the personal income taxes structure, both in terms of rates and deductions such that additional disposable incomes could be put into the hands of lower and middle income class groups.

"At this time when global economic conditions are not very suitable for the Indian economy and for the global economy as a whole, the government has to rely very heavily on domestic demand drivers," he told PTI in an interview.

Srivastava said FY26 Budget should earmark a 20 per cent growth in capex spending over the revised estimates for current fiscal. He projected fiscal deficit at 4.8 per cent of GDP in current fiscal, and 4.4 per cent in the next.

The Budget for 2025-26 will be presented on February 1.

"We expect that the Budget will establish a meaningful balance between two opposing trade-offs between fiscal consolidation and fiscal stimulus. We expect that the government would choose for its fiscal stimulus measures both an investment route and to some extent a consumption route. An investment route is the main driver of domestic demand. So far it has succeeded, and that is the reason why in the last three years we had a reasonable growth," Srivastava said.

In the current fiscal, the Indian economy is projected to grow at 6.4 per cent and the Economic Survey in July last year had projected a GDP growth rate of 6.5-7 per cent.

Srivastava said the moderation in growth that is seen in the current fiscal is mainly on account of a slowdown in government capital expenditure. Between April-November 2024, capex spends stood at Rs 5.13 lakh crore, 46 per cent of the Budget estimates of Rs 11.11 lakh crore.

"Investment expenditure growth momentum will have to be restored as part of fiscal stimulus, but alongside there would be a need also to stimulate consumption expenditure... There is a need to rely about 80 per cent on investment growth and about 20 per cent are stimulating consumption expenditure," he said.

Srivastava said infrastructure investment also helps the supply side of the economy and hence in the FY26 Budget, the government would continue to rely heavily on infrastructure expansion.

"We can have a 20 per cent growth in capital expenditure, relative to lower base of the Revised Estimates of FY25. At the same time we will have growth and fiscal resources to reduce fiscal deficit to 4.5 per cent. There will be no major challenge to achieve this route. It is high time that the government come up with the next version of the infrastructure pipeline introduced 5-6 years ago," he said.

The Budget looks for some support from monetary side and in FY26, there could be a 50 basis points reduction in interest rates by the RBI in two instalments.