With Finance Minister Nirmala Sitharaman all set to present the Union Budget 2025 today, economists said the Budget will skillfully balance fiscal consolidation and measures for advancing growth. Sonal Badhan, Economist, Bank of Baroda, said, “The Budget will stick to its path of fiscal consolidation, without compromising on quality of expenditure. In the wake of moderating domestic GDP growth, headwinds from weakening global growth, and risks emerging from stronger US$ and tariffs threats by Donald Trump, this budget will lay down policies to ensure our growth prospects remain insulated.”
The central government is expected to achieve or may even undershoot (by around 10 bps) its fiscal deficit target of 4.9 per cent (% of GDP), owing to expected savings on the expenditure side. From these levels, the Bank of Baroda report maintained, the government is expected to reduce the deficit target by ~50bps in FY26BE, thus targeting a 4.3-4.4 per cent range. How will the government support growth? Amidst slowing global growth scenario, the government will focus on boosting consumption (both rural and urban). For this, economists said that enhanced spending on MGNREGA, PM KISAN, and PMAY can be expected. In addition, certain tax incentives may also be announced. Driving investment growth will be another focus area for the government. Bank of Baroda expects Rs 1-1.5 lakh crore incremental increase in capex for the next year over the revised estimate for FY25.
Further, Bank of Baroda stated that markets will also keep a watchful eye on the government’s borrowing program, which is anticipated to increase only marginally next year (to ~Rs 15 lakh crore). As a result, bond yields will remain stable. However, Axis Securities said, with the impact of the Union Budget on the equity market reducing notably over the past few years, with the government undertaking most of the reforms outside the purview of the Budget. In line with this, Axis Securities also stated against the slowdown in corporate earnings during H1FY25, the market participants continue to view the FY26 budget as a critical catalyst for stimulating the Indian economy’s growth and, thereby, the Indian market. “At the current juncture, we believe the Budget will likely strengthen the narrative of ‘Viksit Bharat’ by 2047, following a transformation similar to the one witnessed in the last decade,” it said.
Schemes to propel growth
While maintaining a balance between growth and fiscal consolidation, important schemes such as PM-KISAN, MGNREGA, Housing for all, free food grains, will continue to hold significant importance. In addition, Bank of Baroda said that tax incentives and greater focus on skilling India’s youth will also garner attention. Focus on infra spending will continue. “On the receipt front, growth is expected to stabilize, in line with nominal GDP growth. Higher consumption, given policy support and lower inflation will push government’s revenues in a comfortable position. The borrowing program will also remain relatively unchanged, as lowering debt levels begins to take centre stage of policy formulation. Lower bond yields, and deposit rates (as RBI embarks upon rate cut cycle in FY26), will also help lower the debt burden,” said Sonal Badhan.
Consolidation amidst supporting growth
In this Budget, the government is expected to announce significant measures to boost domestic consumption and private investment, as the economy braces for headwinds from muted global growth. This agenda, Bank of Baroda said, will be achieved without compromising upon the fiscal health of the government, as it has shown commitment towards fiscal consolidation even in the past. The analysis report by the firm stated that Normalisation of nominal GDP, higher revenue growth following revival in consumption, and rationalisation of subsidies will give the government much needed fiscal room to lower deficit levels.
Sonal Badhan said, “Quality of expenditure is unlikely to be compromised upon for two reasons—one, to crowd in private investments by boosting government capex, and two, to support growth and maintain continuity of key social schemes. We thus expect the central government to announce a ~50bps reduction in fiscal deficit target for FY26.”
Fiscal consolidation to continue
Even as global headwinds remain strong, inflation is projected to get normalised and RBI may start cutting rates soon whilst domestic consumption gets a further boost. A jump in government spending is expected to encourage private investments. As a result, the government’s revenues will be able to maintain a stable growth rate. Assuming this, per Bank of Baroda, nominal GDP is estimated to register ~10.5 per cent growth in FY26 (up from 9.7 per cent in FY25), and fiscal deficit is expected to come in at ~Rs 15.2-15.7 lakh crore, implying a deficit of ~4.3-4.4 per cent (~50bps less than FY25’s estimate of 4.8-4.9 per cent).
Gross borrowing programme
For FY25, the government is expected to meet its gross borrowing target of Rs 14.01 lakh crore and net borrowing target of Rs 11.63 lakh crore. Despite savings on the expenditure side, the government will maintain the target, and lower the capital off-take from other sources, such as small savings.
Subsidy levels
Following a higher than budgeted increase in subsidies in FY25, on account of food and fertilizers, they are expected to be rationalised to some extent in FY26. In FY25, the government had budgeted Rs 3.8 lakh crore for major subsidies (food, fertilizer and petroleum). However, following the increase in MSP for Rabi crops in the marketing season 2025-26, the government is expected to exceed its budgeted estimate (BE) by ~10 per cent. Other factors that are contributing to the rise in subsidy cost, include higher cost of storage and transportation.
Fertilizer subsidy is also expected to be higher than BE by 9-10 per cent. “We believe fertilizer subsidy will be maintained at ~Rs 1.7-1.8 lakh crore, as stronger US$ will continue to impact import prices for the large part of the next fiscal year as well,” Sonal Badhan said.
Focus on capital expenditure
In order to move closer to realising the dream of ‘Viksit Bharat’, the Union Government will continue to prioritize capex to push investments and improve the quality of expenditure. According to Bank of Baroda, the government is expected to enhance its capex not only for infrastructure projects (ports, roads, railways and power), and defence, but also on health (hospitals, pharma), education (skilling institutes) and space technology.
Revenue receipts to stabilize
On the revenue side, tax receipts would be critical in determining the extent to which fiscal consolidation can be achieved next year. Coming off from a high base, Bank of Baroda expects revenue growth to stabilize in FY26.
Key themes: Driving consumption and investment
While there has been slight moderation in real GDP growth and signs of strains in urban consumption, the government through its budget will aim to give both rural and urban growth a boost. Government capex is also expected to maintain a healthy pace of growth to give a nudge to private investment. Per Bank of Baroda said that in order to support these agendas, government may:
- Increase the budget allocation for MG-NREGA scheme from Rs 86,000 crore in FY24RE to ~Rs 95,000- 1 lakh crore in FY26.
- Significant jump can be expected in provisioning for affordable housing (rural and urban), given rising construction costs. Budget allocation may touch ~Rs 1 lakh crore from ~Rs 85,000 crore as per FY25BE.
- Increase the budget allocation for PM Kisan Samman Nidhi (PM-KISAN) scheme from Rs 60,000 crore in FY25BE to ~Rs 70-75,000 crore in FY26, in order to increase income support for farmers.
- Expect ~40-50% jump in allocation for skill India program (FY25BE: Rs 2,686 crore) to improve employability.
- Introduce PLI scheme for MSMEs.
- Incentivise EV charging and agriculture warehouse infrastructure.
- Increase Kisan Credit Card loan limit from currently Rs 3 lakh to Rs 5 lakh.
- Retain focus on capex and increase it to ~Rs 11-11.5 lakh crore.
On the taxes side, it listed out certain proposals that may get importance:
- To help sustain consumption growth, and lighten the burden of consumers due to elevated prices in recent years, the government may increase limits under standard deductions.
- Savings under section 80C can be increased from Rs 1.5 lakh to Rs 2.5 lakh. Limit for additional savings under pension contribution may also be hiked.
- Savings under 80D for health insurance premiums can be hiked from Rs 25,000 to Rs 50,000, given rising cost of healthcare and insurance premiums.
- Life insurance premiums can also be included under 80D exemption, to increase penetration.
- In order to attract more tax payers to adopt the new tax regime, tax rate can be reduced for under Rs 15 lakh income bracket.
- To boost sustainable tourism, tax incentives for hotels/home stays adopting environment friendly practices can also be expected.
- Custom duties on raw materials may be reduced to correct the inverted duty structure. Automobile parts, textiles, machinery components and IT hardware sector may benefit.