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As India’s growth engine slows, with GDP growth projected to decelerate to a four-year low of 6.4% in FY25 from 8.2% in FY24, the upcoming Union Budget will be a critical policy lever for reigniting growth momentum. NSO’s first advance estimates reveal some concerning trends-manufacturing growth slowing from 9.9% in FY24 to 5.3% in FY25; weakening investment momentum with gross fixed capital formation at a six-quarter low of 5.9% in Q2 FY25; and tepid urban and rural consumption. Meanwhile, global headwinds, including subdued trade and geopolitical uncertainties, continue to strain India’s export potential.
Concomitantly, the Finance Minister faces a complex fiscal challenge. With nominal GDP growth expected to reach only 9.7% in FY25, below the FY25 budget target of 10.5%, managing the fiscal deficit will require a careful balancing act. The FY25 deficit target of 4.9% of GDP may reach 5%, making it crucial to maintain the fiscal glide path without compromising growth-enabling expenditure.
In such a context, the FM’s first imperative will be to review and rationalize direct taxes. Despite reductions in corporate tax rates, SMEs and mid-sized firms face high effective rates that limit their global competitiveness. Rationalizing tax rates for such firms, and adjusting slabs for inflation could spur reinvestment and expansion. Also, for the crucial Rs 15-50 lakh income segment, which forms the backbone of urban consumption, targeted relief—such as increasing the standard deduction
limit; extending the HRA exemption limit to Tier 2 cities, recognizing their emergence as major economic hubs with rising living costs; and removing the Rs. 2 lakhs cap on offsetting house property losses against other income—could boost retail spending and loan growth. Such steps could reinvigorate private investment and revive consumption demand, which are linchpins for GDP growth.
Driving capex
Second, capital expenditure deserves heightened focus, too. With the Centre likely missing its FY25 target of ₹11.11 lakh crore by ₹60,000 crore, and a 14.7% decline in government capital expenditure during April-October 2024, the budget must take steps to reverse the twin slowdown in public and private investment. This should include expanding the National Infrastructure Pipeline with time-bound execution targets; introducing tax-efficient infrastructure bonds to crowd-in retail investment; and establishing specialized credit guarantee schemes for infrastructure financing companies. Raising Section 80C limits for infrastructure-linked savings products and offering favourable depreciation regimes for new capital investments could also catalyze growth.
Third, India’s external sector weaknesses warrant interventions, particularly as services exports emerge as a potential stabilizing force amid currency and reserve pressures. While the Rupee’s slide to nearly ₹87 against the US Dollar and $70 billion erosion in forex reserves are concerns, services exports offer a countervailing opportunity.
Growing at a CAGR of 10.5%, services exports are projected to reach $618 billion by 2030, marginally surpassing merchandise exports. However, this growth is concentrated in software and IT services (56.2%) and Other Business Services (33.2%), with the US alone absorbing 70% of IT exports. The budget should address such vulnerabilities by strengthening forex hedging facilities, providing tax incentives for companies diversifying into untapped segments like transport and financial services, and helping Indian firms capture more of the $1.8 trillion global Other Business Services market through targeted skilling initiatives and export-promotion schemes.
Farm thrust
Fourth, experts have consistently pointed to India’s dismal agricultural research intensity, which has plummeted from 0.75% in 2008-09 to merely 0.43% in 2022-23, threatening long-term agricultural productivity.
The Budget must substantially increase budgetary allocations to agriculture R&D, which can drive breakthrough crop innovations, enhance climate resilience, and ensure food security.
Besides, researchers have found that a ₹1,000 crore investment in agriculture R&D can generate ₹10,000 crore in agricultural GDP, representing a phenomenal 10x economic multiplier effect that can fundamentally transform rural productivity and national economic growth.
Finally, the Budget must address the growing divergence between growth and employment generation. Labour-intensive industries like construction, textiles, tourism, and footwear need targeted support to create jobs and boost export revenues. Also, with female workforce participation critically low, gender-sensitive frameworks, such as formalizing the care economy, are imperative.
The budget must signal a decisive break from incrementalism and embrace transformative reforms. The Finance Minister has an unenviable task ahead, but with the right mix of vision and pragmatism, she can lay the groundwork for a more resilient, inclusive, and dynamic Indian economy in this Budget.
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