Budget amid global turmoil, domestic slowdown

A disruptor in the US, a growth slowdown at home, household debt – the challenges are many

Finance Minister Nirmala Sitharaman will present her record eighth budget to Parliament on February 1. This is her second one during the third term of Prime Minister Narendra Modi. Her last seven budgets have seen ups and downs, the biggest being the disruption and shutdown of major parts of the economy during the Covid pandemic. That year, the GDP went down by nearly 7 per cent. In the last four decades, that year has been the only time that India’s economy contracted, i.e. reported a negative growth rate. While growth has been positive during her reign as FM, presently the economy is facing several formidable challenges. The Economic Survey 2024-25 tabled in Parliament on the eve of the budget is also quite sombre in its tone. It is acutely aware of the fact that unless domestic investment and consumption pick up and foreign investors come in droves, economic growth is going to be a challenge. After three years of relatively good growth, we are facing two consecutive years of slowing down. The reasons are both global and domestic.

The global turmoil is led by actions of the President of the United States Donald Trump. In the very first few weeks of his presidency, he has passed many executive orders with potentially unsettling effects. For instance, he has threatened countries with trade sanctions if they do not accept the repatriation of illegal aliens back into their country. He has withdrawn membership in the World Health Organisation. Stiff trade tariffs against China, Canada and Mexico are on. Funding for major programmes has been cut, and thousands of government officials face the axe. Foreign aid is cut. Trade war with China means that Chinese goods will get diverted and dumped at low cost into third countries like India. China too is facing its slowdown. Even high import trade barriers cannot prevent Chinese goods from flooding India. The bilateral trade deficit is close to $100 billion. How do we bridge that or at least narrow it?

The other big disruption has come from a Chinese app called DeepSeek which has demolished the monopoly of the American company OpenAI which sells ChatGPT. The DeepSeek AI programme does everything that programmes like ChatGPT does, but it is an open-source programme and anyone in the world can adopt, adapt, modify and improve upon it. It achieved this at a fraction of the cost of OpenAI. As a result of the huge success of DeepSeek, the stock market value of Nvidia, the main chipmaker used in AI, crashed by half a trillion dollars. This stock crash is affecting the entire world. In India too, the stock market is down nearly 10per cent. The dollar exchange rate has rapidly fallen to 89 and the dollar outflow from India is worrying. Net foreign direct investment (FDI) is sharply down as well.

Trouble at home

As if that was not enough for the FM to worry about, there has been an acute liquidity shortage in the banking system. Some of this is being addressed on a war footing by the new Governor at the Reserve Bank of India. The RBI is injecting liquidity by buying bonds and dollars and releasing term loans through the banks. In the next meeting of the Monetary Policy Committee, the repo rate might be cut, to signal an easing of loan rates.

The growth slowdown is palpable; this year, it will fall to 6.4 per cent from 8.2 per cent last year. The FM has to signal policies and spending priorities that will at least propel it back to 7 per cent if not 8 per cent next year. But this cannot be done merely by fiscal expansion, as has been the trend in the last few years. The fiscal deficit needs to come below 4.5 per cent as promised. This will mean fiscal consolidation and prudence. Else, the fiscal expansion leads to higher interest rates, inflationary pressure, and unsustainable debt. The debt situation of households is a matter of great concern. The household debt to GDP ratio is the highest it has been, at 43 per cent of GDP. Net financial savings i.e. net of financial liabilities of households were at a 50-year low till recently, just barely 5 per cent of the GDP. Savings are the driver of economic growth, and we badly need to revive household savings. Recently, the RBI tightened unsecured loans and microfinance, perhaps out of an apprehension of a build-up of bad loans and delinquency. Consumer spending is sluggish and barely growing at 3 per cent when it should be at least double of that.

Thankfully, the spending on the Kumbh Mela is a booster for consumption. It is expected that with nearly 400 million footfalls, and assuming 5,000-rupee spending per-capita, the Kumbh Mela might see about Rs two lakh crore of spending, all good news for the GDP. The big driver of growth which needs revving up is private investment spending. It should be at least 28 per cent of the GDP but is much lower now. Can the Union Budget infuse some enthusiasm and animal spirits to get private investors to start investing in new businesses, factories and new capacity? It must be remembered that the FM does not have too much room to manoeuvre since 77 per cent of her spending is on revenue items, like interest on debt, salaries, pensions and committed subsidies.

Hence, much depends not only on the spending numbers, but the signals that she gives in terms of the policy stance of her government. It is a tough year, and here is wishing the FM presents a budget that combines growth-boosting measures along with fiscal prudence.

(The writer is a noted economist; Syndicate: The Billion Press)

Union Budget 2025 | Nirmala Sitharaman, who continues to be Finance Minister, will present her record 8th Union Budget this time. While inflation has burnt a hole in the pockets of 'aam janata', reports suggest there might be a tax relief for those making up to Rs 15 lakh per year. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.