Budget nudges growth in the immediate term, opens pathways for new reforms  

The macroeconomic impact of budgetary announcements is positive in the short term.

The first budget in the third term of the newly elected Narendra Modi government called for some reshaping of its policy path, as it looked forward to the next five fiscals and at the Viksit Bharat 2047 goals.  

The fact that another budget looms seven months from now provides a chance for course correction, just in case. 

So, the opportunity was to set the ball rolling on new policy pitches that take cognisance of new areas that may require support to ensure resilient, sustainable and more equitable growth.  

Put another way, there is time to prepare and test the waters. 

Against this backdrop, let’s take stock of what the full Union Budget for 2025 does. 

It maintains prudence in fiscal management, maintains attention on focus areas and initiates a dialogue for ushering in next-generation reforms.  

What continues: improved revenue augmentation (by enhancing revenue collection efficiency and newer taxes), the thrust on capex (having cemented its role in driving durable growth) and the pursuit of fiscal consolidation (at a faster pace). With growing geopolitical uncertainties and climate risks, maintaining a fiscal buffer for times of distress is critical. 

What is new: a re-tilt towards revenue spending where necessary (support to weaker sections in rural areas where rains play truant and urban areas where the post-pandemic recovery is still incomplete), incentivising employment generation (by taking steps to work in collaboration with the private sector) and mitigating climate change adversities in the short term. 

What is in the offing – scope for dialogue to usher in new economic reforms (required to build resilience and leverage on newer growth opportunities), improve the ease of doing business (by rationalising taxes, tariffs and duties to make Indian manufacturing competitive), enhance factor efficiency (of land, labour, capital and technology) and foster innovation (in areas of energy transition and agriculture productivity enhancement).  

The macroeconomic impact of budgetary announcements is positive in the short term.  

The budget responsibly deploys the higher revenue (tax and non-tax revenue) on reducing the fiscal deficit, sustaining spending on investments and making way for higher spending to support segments that require support. Overall, the quality of spending remains intact despite the slight tilt towards revenue spending. 

A lower fiscal deficit and the non-inflationary nature of spending are inflation-positive, while lower market borrowings will help temper yields. We expect the 10-year government bond yields to average 6.8% by March 2025, from 7% in March 2024, supported by lower market borrowings, a policy rate cut by the Reserve Bank of India (expected in October) and lower inflation.  

On the back of a normal monsoon and cooling food inflation, we expect headline consumer price inflation to soften to 4.5% on average this fiscal from 5.4% in the last. We maintain our gross domestic product growth forecast at 6.8% for this fiscal– a moderation from 8.2% in fiscal 2024, led by tighter lending conditions. 

However, the government will need to unleash a new set of reforms to ensure a sustained pick-up in growth over the medium term. 

For now, the budgetary measures acknowledge the pain points in the economy, take actions to alleviate stress in the short term and outline areas where policy action is needed to smoothen the growth process. 

The next seven months, therefore, give the government a good time period to ponder and design policies that will kick in the next round of reforms.