By Rajnish Gupta

What has changed since the last budget was presented? Firstly, India’s FY 25 growth estimates have been revised downward by many agencies, including the RBI, from ~7% to ~6.5%. This came on the back of slower growth in Q2 of FY 25. While India’s growth drivers such as macroeconomic stability and service exports continue to be strong, measures that can stimulate short- and long-term growth will be closely analysed. Secondly, the new US administration’s actions have brought the focus on the importance of deregulation, manufacturing, and local job creation, access to cheap energy, and managing Government-to-debt ratios. These issues are also important for the Indian economy.

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Growth in Government capex to GDP is really a post-Covid phenomenon. Combined capex of the Union and State Governments increased from 3.6% of GDP in 2019-20 to 5.6% in 2023-24. One of the intents was to preserve growth while private capex was expected to be subdued. Central Government capex till date in FY 25 has underperformed FY 24 by 17%, impacting economic growth. There are three areas of interest with regard to Government capex. First is the likely spend in FY 25. Secondly, the allocation for the coming year, i.e., FY 26—what will be the increase? Lastly, will the capex spending be made more broad-based beyond railways, roads, and defence? Urban infrastructure is one area that needs and can possibly absorb significant capital spending. This is, however, a state subject. Any scheme or programme that the Government formulates, working with the states for funding and developing urban infrastructure, will not only improve the quality of day-to-day life but can be a driver of long-term growth.

While the Government formulates its capex budget and priorities, the general expectation is that the Government will exceed its fiscal deficit target. Achievements till date and continuing fiscal consolidation are welcome. Given the need for fiscal consolidation, there is limited room for expanding public investment at the scale seen since the onset of Covid, as discussed above. Therefore, private investments need to go up. Nurturing PPPs for private investments in infrastructure, divestments, and policy nudges that incentivise private investments, especially in manufacturing, are important for long-term growth.

PPPs and divestments are particularly important. Infrastructure investments in India involve significant construction and project implementation risks, which the Government has taken. The Government can consider monetising infrastructure assets through InvITs and other instruments. InvITs ensure continuing operational control, help raise money for the Government, or reduce the debt taken specifically for the assets. Government receipts from dis-investments have been fairly static. In FY 24, they were Rs 33,000 Crores, less than 4% of the Government’s capex budget of 9.5 lakh Crores in FY 25.

Private investments, especially in manufacturing, are particularly important for long-term job creation and are at the centre of the global agenda. China has generated a US$ 1 Trillion surplus on the back of manufacturing strength. There are principally five areas of interest with regards to manufacturing:

  1. First is the need for a review of India’s import tariffs, committed to in the last budget. A long-term tariff certainty, together with adequate protection for domestic manufacturing, can facilitate investments.
  2. Secondly, energy products outside the GST are a cost for manufacturing in India, as these taxes cannot be set off. Imports of goods into India attract IGST, which countervails the GST payable on domestic manufacturing. However, there is no equivalent duty on imports that countervails taxes and duties outside the GST. Inclusion of these goods would be positive for manufacturing, especially energy-intensive manufacturing.
  3. Thirdly, reforms and simplifications that facilitate ease of doing business can make Indian enterprises more competitive and nimble. Minimising tax disputes, decriminalising economic laws, or faster legal processes are all examples.
  4. Fourthly, a question being asked relates to announcements regarding incentives for manufacturing, in the form of new production-linked incentives or through a preferential tax rate for new manufacturing investments.
  5. Fifth, measures with regards to implementation of labour reforms or land, including the availability of industrial infrastructure, can accelerate investments. These are state subjects; nevertheless, how the Government works with states will help.
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Finally, the last few budgets have seen announcements regarding long-term competitiveness and growth, such as a fund for innovation or the implementation of an AI ecosystem in India. Entrepreneurship and technology development will impact the future competitiveness of countries. Any changes to existing programmes or the announcement of new initiatives would be of interest.

Given the backdrop, the budget presents an opportunity for the Government to introduce pragmatic reforms, take measures to stimulate growth through facilitation of capex, including private capex (especially in manufacturing), and ensuring fiscal prudence.

The writer is partner, Tax and Economic Policy Group, EY India.