By N Chandra Mohan, The writer is an economic and business commentator based in New Delhi
Most Budgets seek to balance different objectives like boosting growth, higher spending on social objectives like improving farmer welfare, providing housing, drinking water and healthcare for all, etc. while remaining fiscally responsible. Union finance minister Nirmala Sitharaman’s eighth consecutive Budget is no different in this regard.
To address a sharp slowdown in growth to 6.4% this fiscal according to the first advance estimate from 8.2% in FY24, Budget 2025 unveiled massive tax reliefs for the urban middle class to stimulate higher consumption alongside a continuing thrust on capital expenditures to maintain the current growth momentum while reducing the fiscal deficit to 4.4% of GDP next fiscal.
The tax relief has no doubt provided a feel-good factor but there are serious questions whether it would provide the boost to consumption demand that would stimulate higher private investments and bolster growth. Fast-moving consumer goods companies, for instance, feel that only half the tax savings will be spent on essential and discretionary purchases as the middle class utilises the savings to pay off loans or save.
Corporates are not driving the growth story because there is still a lot of excess capacity. In manufacturing, capacity utilisation rates fell to 74% in Q1FY25 from 76.8% in the previous quarter. They need to go up much further to a point where private industry requires additional capacity.
This can happen only if demand uncertainty reduces. Not surprisingly, the stock markets have responded listlessly to the tax reliefs, but they have been rattled by the prospects of a looming trade war that can upend Budget 2025’s projections on growth and inflation. US President Donald Trump imposed 25% tariffs on Mexico and Canada — provoking retaliatory tariffs — but paused them for a month following last-minute negotiations with both nations. The 10% levy on China has kicked in and the dragon has retaliated.
The European Union is next in line. So is India. Trade wars are bad news for the markets as they negatively impact global trade and GDP which have knock-on effects on the Indian economy. A further slowdown in growth will hit tax revenues and derail efforts to keep the fiscal deficit as per the budgetary target.
Although the tax reliefs represent a “Hail Mary pass” of sorts to nudge an upswing in private investment-led growth, this objective remains an unfinished agenda of Sitharaman’s eight Budgets. Domestic investments were tepid even when she first presented Budget 2019. Despite exhortations at the highest levels for India Inc to overcome its hesitancy to invest, a virtuous spiral has been elusive as investors face serious difficulties in doing business on the ground, especially in the various states.
They need more stable policies and regulations. To rekindle their depressed animal spirits, reforms that free up land and labour markets must be implemented. “Getting out of the way” is imperative, to borrow an expression of the latest Economic Survey.Sitharaman’s maiden Budget proposed a number of initiatives as part of a framework of “kick-starting a virtuous cycle of domestic and foreign investments”. Budget 2023 even sounded Keynesian when she stated that a “virtuous cycle of investment requires public investment to crowd in private investment.
At this stage, private investments seem to require that support to rise to their potential and to the needs of the economy. Public investment must continue to take the lead and pump-prime the private investment and demand.” The provenance of this sort of thinking goes back to the first Economic Survey when the National Democratic Alliance regime came to power in 2014 which argued that an increase in public investments will not crowd out private investments.
The Union finance minister accordingly sought to provide a strong public capex push — with spending doubling from 1.7% of GDP in Budget 2019 to a high of 3.4% in Budget 2024, which was revised downwards to 3.1 %. It remains at this level also in Budget 2025, naturally triggering speculation whether this Keynesian strategy has run its course, indicating limits to the government’s institutional capacity for driving a public capex push. Sitharaman denies this, stating that the thirst for capex is still there.
The slower pace this fiscal was due to elections and with central and state governments catching up with investments in the second and third quarters. The thrust on capital expenditures has not been foregone to boost consumption demand.As the government is committed to be fiscally responsible, obviously there are limits to financing public capex with larger borrowings, which only crowd out potential savings available for higher private investments.
The only problem is that private investments have, so far, not crowded in to drive overall growth; more so now as the economy now faces the full brunt of Trump’s tariff bluster that can potentially upset the assumptions of Budget 2025. The disruption also extends to further downward pressure on the rupee as the US dollar further strengthens under his presidency, making our imports more costly. Despite the markets not exactly giving the thumbs-up to the tax reliefs, Budget 2025 has reduced the fiscal deficit while continuing the thrust on public capex to drive the currently fastest-growing large economy in the world.
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