Union Budget 2025: ‘Challenge of pump priming economy to foster growth while maintaining fiscal consolidation’

When Nirmala Sitharaman presents the Union Budget tomorrow, it will be her eighth consecutive budget as the finance minister, a record of sorts. Over the years, India’s demographic dividend and the growing middle class driving the economy have often been highlighted. But, this time around, the same middle class, which has cut back on spending and is hit hard by inflation, is a big challenge that she is facing. 

Lower salary increments in the private sector, as well as new technology such as AI and automation that, while increasing productivity, is also threatening some jobs, is another worry. So looking to create new job opportunities as well as skilling and upskilling the young workforce will also be the need of the hour. 

Over the last few years, while the government has done much of the heavy lifting when it comes to capital expenditure spending, private sector investments have remained lacklustre. That is yet another challenge that the finance minister would have to find a solution to. 

So, the finance minister may go all out to woo the middle class. But, at the same time, it will have to ensure it doesn’t deviate significantly from its fiscal consolidation path. Sitharaman will also have to bear in mind the impact US President Donald Trump’s trade policies could have on the export front as well as the foreign investment flows and, in turn, the rupee. 

Finance minister Nirmala Sitharaman presents the Economic Survey ahead of the Union Budget | PTI

“India’s Union Budget FY2025-26 arrives at a critical juncture, with GDP growth projected to slow down to 6.4 per cent in FY25, the weakest in four years, amid muted domestic demand, and weaker private investments. Policymakers face the challenge of pump priming economy to foster growth and maintain fiscal consolidation while navigating geopolitical uncertainties,” said the analysts at PL Capital.

A key area where the capital markets firm and many others are expecting a lot of action is the personal taxation front. 

PL Capital expects the finance minister to provide tax relief for the middle class, possibly through increased standard deductions, lower tax rates, or adjusted tax slabs. There may also be some relief on taxation on income for senior citizens, it feels. The budget may also increase the tax deduction limit on home loan interest from current Rs 2 lakh, it added.

One of the reasons behind the slowing economy was the lower government capex spending in the first half of the year amid the parliamentary elections. That out of the way, spending has picked up in the last few months. However, with only 42 per cent of the budgeted capex utilised till November, it is evident that the capex target for the current financial year will be missed, analysts state. 

One good thing is that direct tax revenue from April to November was up 8.7 per cent, driven by a 23.5 per cent increase in income tax collections, offsetting weaker growth in corporate tax, excise duty and GST. 

But, “populist welfare measures announced during state elections, such as cash payouts, could add pressure on state finances, potentially impacting state-level capex,” the analysts at PL Capital note. 

States like Karnataka, Punjab, Himachal Pradesh, Maharashtra and Uttarakhand are already facing fiscal stress, they point.

The Union Budget is likely to see increased focus on infrastructure projects with defined timelines, according to PL Capital. This includes sectors like highways, renewable energy, railways, data centres, and logistics hubs, which can have a multiplier effect on the economy and perhaps kickstart private investment. 

Analysts feel that a substantial hike is expected in healthcare spending to over 2.5 per cent of GDP. The government may also expand the Ayushman Bharat scheme to more sections and reduce duties on and taxes on diagnostic equipment and services, they added.

On other sector-specific measures, the government may announce measures to curb subsidised Chinese steel imports into India. There is a potential for a reduction in import duty on edible oils, they feel. At the same time, a minor increase in excise duty on cigarettes is also a distinct possibility, according to PL Capital. Also, the finance minister will continue to focus on investments in railways (rolling stock, capacity enhancement and safety features like KAVACH) as well as defence (electronics, shipbuilding, vehicles and aircraft).