A Balancing Act

With growth slowing and fiscal pressures mounting, India's latest budget aims for stability, but does it deliver on reforms, investment, and inflation control?

- FR. JOHN FELIX RAJ & SOVIK MUKHERJEE

India is poised to solidify its position as a global economic leader, with the World Bank's January 2025 Global Economic Prospects (GEP) report predicting it will remain the fastest-growing large economy for the next two fiscal years. The report forecasts a steady growth rate of 6.7% in FY26, outpacing global and regional averages. However, despite this optimistic outlook, concerns persist. India's economic growth slowed to 5.4% in the July-September quarter, marking a seven-quarter low. This decline has sparked worries and heightened the significance of Budget 2025. In response, the RBI revised its growth projection for 2024-25 downward from 7.2% to 6.6%.

The First Question Against the backdrop of a slowing economy, Finance Minister Nirmala Sitharaman presented her eighth consecutive Budget, striking a delicate balance between multiple challenges facing the Indian economy. With the government prioritizing fiscal consolidation to enhance macroeconomic stability and promote sustainable growth, all eyes were on India's fiscal deficit position. Budget 2025-26 was crafted with a focus on key economic goals, including consumption, investment, inflation, and interest rates. This year, consumption and capital expenditure (capex) took centre stage. The fiscal deficit calculations for FY25 are noteworthy, as the economy is forecast to expand by 9.6% in nominal terms, lower than the 10.5% growth estimated in the previous budget. However, misguided austerity measures, stemming from the government's fixation on reducing the budget deficit, may compromise economic growth plans. Instead of increasing income or rationalizing non-essential spending, capital expenditures are being reduced to meet the fiscal deficit target of 4.4% of GDP. This raises the first question: Can India maintain its fiscal deficit target in FY26?