Will Budget 2025 Find Sweet Spot Between Inflation & Growth?

Finance Minister Nirmala Sitharaman will table the Union Budget 2025-26 on February 1, at a time when India faces mounting economic headwinds. With just 22 years left to achieve its 'Viksit Bharat' vision by 2047, the country is grappling with slowing growth, persistent inflation, and financial strain on households.

India's growth is estimated to be at a four-year low of 6.4% in FY25, while retail inflation has been surpassing the Reserve Bank of India's (RBI) medium-term tolerance band of 4% for several months. Subdued wage growth also has been forcing the middle class to cut costs even on essentials.

The Finance Ministry in its November monthly economic review pointed RBI's monetary policy as a major factor behind the slowdown in the first half of the FY25. Now, anticipation is running high around the budget to see how the government steps in to tackle these challenges and give India a much-needed relief.

Shadow of Growth and Inflation

A slowdown in manufacturing and in corporate investments has been dragging India's growth. Private investment is estimated to grow by 6.4% in FY25 as compared to 9% growth in the previous fiscal, mostly driven by a subdued demand.

According to Chief Economic Adviser VA Nageswaran, global slowdown in manufacturing due to excess capacity and import dumping in India naturally slowed manufacturing down.

Even as policymakers looked towards the RBI anticipating a rate cut to boost growth, citing high inflation in the country, the central bank has been maintaining its repo rate at 6.5% for two years now.  The central bank's inflation forecast for this fiscal year also stands at 4.8%, marginally higher than its tolerance band.

High food prices were one of the major contributors to the rising inflation in India which also caused a demand slowdown. However, due to moderating food prices, the inflation rate dropped to 5.22% in December after peaking at a 14-month high of 6.21% in October.

Even though this indicates a positive sign, economists have highlighted that ongoing global uncertainties and pressure on the rupee could pose a challenge in reducing inflation further anytime soon.

A report by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Quess Corp also highlighted the issue of stagnant income, identifying it as a major factor behind the slowdown in demand, according to The Indian Express newspaper.

Read More | Can Government Make Indians Spend More to Support India’s Falling Growth Rate?

Role of The Budget

 The union budget is the most important financial tool in terms of allocating resources to support the economy through multiple measures including public welfare, investment and job creation. It ensures a country's inclusive progress.

To revive the middle-class demand, experts have weighed on boosting India's crucial economic engine -- the micro, small and medium enterprises (MSMEs). With more than 6.30 crore enterprises, this sector is responsible for 24.14 crore jobs and around 45% of exports.

Grant Thornton in its pre-budget expectations survey highlights that investments in skilling programs, public-private partnerships, and easing access to international markets will help startups and MSMEs scale, attract capital, and create jobs.

The survey also believes that the focused initiatives to increase disposable income in underserved areas including rural infrastructure and direct benefit transfers can significantly impact consumption patterns.

"Ensuring sustainability and equity in the farm sector, by extending MSP [minimum support price] to critical produce like potatoes, tomatoes, and onions, alongside rationalised nutrient subsidies, can stabilise prices and safeguard farmer incomes," says Gopal Jain, managing partner at Gaja Capital.

Experts have pointed out that a strong commitment towards capital expenditure (capex) and investments in infrastructure projects can also drive job creation and productivity gains.

"Capital expenditure is anticipated to rise to Rs 13 lakh crore, up from Rs 11.11 lakh crore in 2024-25, driving infrastructure development and long-term growth," says Hemant Jain, president at PHD Chamber of Commerce and Industry. He also calls for strengthening the agricultural infrastructure to improve supply chains and mitigate food price escalations caused by inadequate logistics and storage facilities.

Due to pressure on the rupee against the dollar, financial resources are flowing back into the US economy as it is perceived to do well under the new regime. In this case, EY noted, the budget may examine the structure of import tariffs to safeguard domestic industry, particularly manufacturing. This can reduce demand for imports and the dollar, incentivising domestic manufacturing.

On the tax front, experts believe that the income tax rate cuts will help boost demand for the upper middle class and top income groups.