We need an extraordinary budget for extraordinary times

This budget must go beyond the usual populist slogans and fiscal arithmetic to spell out a vision of how the government plans to tackle the slowdown and the extraordinarily volatile external environment.

The upcoming Union Budget needs to be one for the history books. It should boost confidence in the Indian economy, rekindle animal spirits and lay the foundation for sustained growth.

Global challenges

This is not the time for a business-as-usual budget. It is a time of great challenges—the world as we have known it over the last thirty years or so is being transformed. Old shibboleths such as free trade, free markets and globalisation are being given short shrift. The rules of international commerce are being upended. Protectionism and mercantilism are back in vogue. The old international institutions are crumbling. The world is splitting up into geopolitical blocs and bullying, bluster and brinkmanship is increasingly replacing international co-operation. As this month’s State of the Economy report in the RBI Bulletin said, "the global economy is shaping up to be anything but ordinary in 2025." This is the time for a momentous budget.

Domestic slowdown

We had for a long time hoped that the strength of our domestic economy would insulate us from the storms outside—indeed, given the West’s disenchantment with China, we believed we might even profit from it. Yet the economy has stalled and there has suddenly been a remarkable change for the worse in sentiment. Businesses have been complaining about faltering urban demand, reflected in the results of FMCG companies such as HUL. The State of the Economy report said that private capex is yet to show visible signs of pick-up and with growth in government capex moderating too, gross fixed investment in GDP and manufacturing in gross value added (GVA) have emerged as the biggest drags on growth. For the December 2024 quarter, Bloomberg consensus estimates expect Nifty-50 companies’ earnings per share to grow just 3 percent year-on-year. Foreign portfolio flows have turned sharply negative, shaking the markets. As a consequence, the wealth effect, which supported premium consumption, is fading. Credit growth has slowed, partly because of RBI clamping down on unsecured loans. That in turn could affect consumer demand. Forex reserves are depleting as the RBI desperately tries to shore up the rupee.

The National Statistics Office has now estimated GDP growth in 2024-25 at 6.4 percent, which is a big disappointment. As we pointed out here, ‘the problem is not that growth is slowing from the immediate post-pandemic period, which is understandable, but that it’s well below the average GDP growth rate between 2013-14 and 2018-19’. What’s more, the IMF, in the January 2025 update of its World Economic Outlook, not only projected India’s GDP growth rate at 6.5 percent for 2025 and 2026 but also said it was ‘in line with potential.’ That’s simply not good enough to ensure jobs for the millions joining the workforce and the millions who need to get out of low-productivity handkerchief sized farms to more productive jobs in manufacturing and services.

What is to be done?

In short, this budget must go beyond the usual populist slogans and fiscal arithmetic to spell out a vision of how the government plans to tackle the slowdown and the extraordinarily volatile external environment, including the imposition of fresh tariffs. We need to have a strong economy to advance our national security in an increasingly dog-eat-dog world. As the State of the Economy report said, ‘The time is apposite to rekindle the animal spirits, create mass consumer demand and trigger a boom in investment.’ We need a roadmap to Make India Great Again.

What should be done? Last year’s Economic Survey had clearly said, "For the recovery to be sustained, there has to be heavy lifting on the domestic front because the environment has become extraordinarily difficult to reach agreements on key global issues such as trade, investment and climate." Those difficulties have increased manifold as a result of the inauguration of the mercurial mercantilist Donald Trump as the new president of the world’s most powerful economy.

The focus then has to be on the domestic economy. There have been demands to boost consumption, with the Confederation of Indian Industry even calling for providing consumption vouchers to low-income households. Such populism should be avoided at all costs—there has already been a profusion of freebies being offered to the masses during the recent elections. The remarkable success of East Asian nations can largely be attributed to their ability to sustain an investment-to-GDP ratio exceeding 40 percent over an extended period. That is what we must aim for and the government must create the conditions to make it happen. It is investment-driven demand that fuels sustainable, non-inflationary growth. No nation has ever achieved greatness solely by consuming its way there.

But government investment will not be enough to move the needle, the private sector must step up to the plate and deliver. To do so, as the Economic Survey pointed out, "they need demand visibility. That comes from employment and income growth." The Budget must deliver a boost to consumption, must increase capex and at the same time provide incentives to the corporate sector to invest. The stimulus to consumption should be provided by tax cuts rather than through handouts. Incentives for housing have the most knock-on effects and need to be increased. A boost to construction is the surest way of providing jobs for the masses. The pick-up in Foreign Domestic Investment could come from removing some of the curbs on Chinese investments, as last year’s Economic Survey had suggested—it had said, ‘it is inevitable that India plugs itself into China's supply chain. Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make’. We also need to lower excise duty on fuel and customs duties on inputs. The markets could be energised by rolling back over-regulation and punitive taxes. And, at the same time, because of the fraught external situation, we need to both increase defence spending and prune the fiscal deficit a bit.

Unleashing animal spirits

The question is: how can the Budget reconcile so many conflicting objectives? Luckily, we have in the 2021 Budget a ready-made blueprint. We had said at the time that the 2021 budget speech was "dear to the hearts of the private sector and equity markets - full of references to privatisation, sale of equity in government companies, increased spending on infrastructure, a stressed asset resolution company to take bad debts off bank books, foreign direct investment, production-linked incentives for creating global manufacturing champions, selling off government land, ports, airports, roads, pipelines, closure of sick public sector units. It's a bonfire of all the vanities. There are no longer any ifs and buts, no shilly-shallying, the government has come out with all guns blazing." Unfortunately, there is a vast gulf between those announcements and their implementation. That gap needs to be filled immediately—the 2025 budget could specify timelines for privatisation and asset monetisation. That will not only provide the funds to get the fiscal deficit down, but the focus on privatisation and infrastructure will improve productivity, thereby increasing the Indian economy’s potential growth.

It will be a huge boost to animal spirits; signal the government’s determination to tackle problems head on; cushion the domestic economy; ensure continued investment, both domestic and foreign, into India; dispel pessimism and invigorate markets.