Will FM Sitharaman go gangbusters in Budget 2025 to bring India's growth mojo back?

Budget 2025

India's slowing economic growth will be front and centre when FM Nirmala Sitharaman rises to present the Union Budget on February 1 for a record eighth time. India's economy slowed to 5.4 percent in the second quarter of the current fiscal and the first advance estimates projected the GDP growth for FY25 at 6.4 percent, a four-year low.

The Modi government's capex playbook has served it well in lifting the economy out of the Covid trough with big-ticket expenditure on creating physical assets like roads, bridges, railway lines among others. The fact that the government did the bulk of the heavy lifting to pump prime the economy without hurting the fiscal consolidation roadmap was duly noted by international rating agencies.

Even though economists have come up with suggestions to relax the fiscal deficit glide path and focus entirely on spending big to put the economy back on the growth path, the government is unlikely to deviate from the consolidation roadmap.

The government is expected to better the fiscal deficit target for the current year on the back of lower-than-budgeted spending on capex. It is likely to reach the 4.5 percent target in the next fiscal year.

RBI windfall shot in the arm

The RBI is expected to boost the government's coffers with another round of bumper dividend boosted by intervention in the currency market to help stabilise the rupee. The RBI had paid Rs 2.1 lakh crore dividend payout for FY24. The windfall is expected to help government keep up its capex momentum without letting go of the fiscal prudence.

The RBI transfers bulk of the surplus income it earns each year to the government. The transfer happens around May after the RBI board gives its approval. The bonanza will help the government to deliver a much-needed fiscal stimulus to the economy at a time when a slew of factors pose a challenge to India's economic growth. Income tax sops aren't ruled out either as Nirmala Sitharaman is well-seized of the consumption slowdown hurting India's economic momentum and knows the importance of more disposable income in the hands of taxpayers.

Rate-cut on the cards?

Soon after the Budget announcement is another watershed event for the Indian economy. The RBI, with a new governor at helm, is expected to cut rate by at least 25 basis points. This would be another big fillip for the economy as it looks for boosters to stay on top.

"The time is apposite to rekindle the animal spirits, create mass consumer demand and trigger a boom in investment," the RBI noted in its recent bulletin.

The capex push, tax sops along with a rate cut are likely to create a perfect scenario for private investments to pick up.

"We anticipate this budget will continue to emphasise capex, which could act as a trigger to support corporate credit growth for banks," said analysts at Axis Securities.

Making economy Trump-proof

The government is likely to introduce some changes in the tariff regime, as US President Donald Trump continues to repeat his threat of tit-for-tat levies .

Global Trade Research Initiative (GTRI) has proposed a reduction in India's average import duty to 10 percent, a step it feels could lead to more domestic production.

It has asked for a re-evaluation of India's tariff structure as bulk of the revenue comes from income tax, corporate tax and GST.

"Given the declining share of customs duties, there's no longer a key revenue pillar and it is time to re-evaluate tariffs as a strategic tool to support domestic manufacturing and global trade," said a note authored by Ajay Srivastava, founder of GTRI, and Satish Reddy, trade facilitation expert and former senior customs official.