Budget: Will FM Deliver A Fiscal Bazooka?

With urban consumption falling sharply, the clamour for a large stimulus has grown louder

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As finance minister Nirmala Sitharaman dots the I's and crosses the t's of her speech she will deliver on 1 February, when she presents a record eighth consecutive budget, her biggest concern will be whether the proposals can dispel the clouds hanging over India, the world's fastest-growing large economy.

After the covid-19 pandemic, India experienced a scorching pace of growth for three years on an average, the economy expanded by more than 8%. However, the second quarter (Q2) of 2024-25 came as a shocker; the country's gross domestic product (GDP) climbed, but by a modest 5.4%.

"The government believes that the GDP trend seen in the second quarter of 2024-25 is only a temporary blip and the economy will see healthy growth in the next quarters," the finance minister said in the Parliament.

Nonetheless, the third quarter (Q3) may not usher in better news, going by advance indicators such as the purchasing managers' index or early corporate results. They don't signal any significant recovery. The Reserve Bank of India (RBI) has scaled down 2024-25 GDP growth to 6.6%. The National Statistical Organization, in its first advance estimates, pegged it even lower at 6.4%.

The reasons for the downward revisions are not far to seek. Multiple factors are smothering India's economic growth.

Urban consumption has fallen suddenly and sharply. Exports are showing no signs of revival. All this means private sector investment, critical to power economic growth, is unlikely to revive.

In addition to the problem, the rupee has come under severe pressure due to the strengthening of the US dollar. This risks pushing up inflation, which, at 5.2%, is already higher than the RBI's target of 4%.

If these challenges were not good enough, global uncertainties have risen. It is not clear how the US President Donald Trump's 'America First' policies will play out and impact global economic growth.

The risk of trade war is high.