Union Budget 2025: Balancing fiscal consolidation with growth

JineshGopani-Taksh

Jinesh Gopani, Founder, Taksh Asset Management

As India gears up for the presentation of the Union Budget for FY26, the focus remains on striking a fine balance between fiscal consolidation and economic expansion. The government has set an ambitious target of reducing the fiscal deficit to below 4.5% of GDP by FY26, necessitating prudent fiscal management without stifling growth momentum. Against the backdrop of slower domestic economic growth (5.4% in Q2-FY25 vs. 6.8% RBI forecast), a weakening currency, and global uncertainties, this budget will be pivotal in shaping India’s economic trajectory.

Government Expenditure: Sustaining Growth Through Capital Spending

One of the defining trends of India’s fiscal policy has been its increasing reliance on capital expenditure to drive long-term economic growth, whose share in the total expenditure mix has steadily increased from 20.7% in FY16 to 31.5% in FY25 (BE).

Over the past decade, the central government’s capital spending on infrastructure has surged from Rs 1.97 lakh crore (1.6% of GDP) in FY15 to Rs 11.1 lakh crore (3.4% of GDP) in FY25 (BE), underscoring its commitment to infrastructure-led growth. If we include central government grants, the total capital expenditure rises to approximately Rs 15 lakh crore.

However, the execution pace remains a concern. As of H1FY25, only 37% of the budgeted capital expenditure had been utilised, primarily due to delays in tendering processes caused by the general elections. A significant portion of spending is expected to materialise in Q4FY25, potentially boosting infrastructure activity in the latter half of the fiscal year.

The government is likely to continue prioritizing investments in transport, urban development, digital infrastructure, and renewable energy. Additionally, public-private partnerships (PPPs) will remain a key enabler in mobilising private capital to augment state-funded infrastructure projects.

Manufacturing & PLI: Strengthening India’s Industrial Base

The Production Linked Incentive (PLI) scheme has been a cornerstone of India’s manufacturing push, aiming to enhance domestic production capabilities and reduce import dependence. The allocation for PLI incentives has seen a 74% increase in FY25 (BE), reflecting strong policy support and positive industry response. The government has earmarked Rs 1.97 lakh crore in incentives, targeting a capital expenditure of Rs 3-3.25 lakh crore over the medium-term.

We expect further enhancements to PLI schemes in this budget, particularly in sectors such as electronic components, new energy technologies (hydrogen, solar, and battery storage), and textiles. Strengthening local supply chains and boosting high-value manufacturing will be critical in positioning India as a global manufacturing hub.

Social Welfare & Consumption: Reviving Demand

A key aspect of the budget will be addressing the challenges in urban and rural consumption. India’s economic growth has been impacted by weakening consumption, particularly among middle-class and rural populations. While household consumption has grown in recent years, discretionary spending outside the luxury segment has slowed. This is largely due to sluggish job creation, stagnant wages, and inflationary pressures. As a result, real private consumption growth is expected to moderate to 4.5% in FY25, down from 7.5% in FY23.

While rural consumption has witnessed a recovery supported by a strong monsoon and government welfare schemes, urban consumption remains constrained due to high inflation and muted credit growth.

To address these challenges, the Union Budget FY26 is expected to focus on measures that enhance disposable income and stimulate demand. The government may introduce personal income tax relief, potentially by adjusting tax slabs or raising Section 80C deductions, to provide relief to salaried taxpayers.

Additionally, the Pradhan Mantri Awas Yojana (PMAY) continues to play a crucial role in bridging the housing deficit. The government’s recent decision to extend the scheme with an additional 3 crore houses (urban and rural) is a welcome move that could boost construction activity, generate employment, and spur demand in related industries like cement, steel, and consumer goods.

Taxation: Enhancing Disposable Income & Simplification

Personal taxation reforms are likely to be a focal point, particularly measures aimed at increasing disposable income and boosting consumption. Potential steps could include:

· Rationalisation of income tax slabs to provide relief to middle-class taxpayers

· Enhancement of standard deduction for salaried employees

· Additional incentives for savings and investments, particularly in retirement and insurance products

On the corporate tax front, we do not anticipate major rate changes, but simplification of tax structures and ease of compliance will be key areas of focus.

Conclusion: Balancing Growth with Prudence

The Union Budget FY26 will have to navigate a delicate balancing act—ensuring fiscal consolidation while sustaining economic momentum. Strategic investments in infrastructure, manufacturing, and welfare schemes, alongside prudent taxation policies, will be essential in fostering sustainable and inclusive growth.

With India aiming to maintain an average GDP growth rate of 6.5-7%, policy continuity, timely execution of capital projects, and measures to boost private sector participation will be critical in ensuring that the budget meets its twin objectives of stability and expansion.

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