Pre-Budget Special: Can FM Nirmala Sitharaman deliver growth in the face of a slowing economy?

However, apart from this rare honour, the Union Budget 2025-26 comes at a time when the economy is facing challenges on almost all fronts. Domestically, growth is slowing and is now estimated at 6.4% for this fiscal and at less than 7% in FY26. Retail inflation has remained stubbornly high and is seen to average 4.8% in FY25. This has impacted urban consumption demand, which has shown signs of moderation in recent months. Meanwhile, manufacturing growth is still sputtering, and private investment and capex are yet to fully kick in. Job creation and skilling and upskilling of workers and providing policy support to micro, small and medium enterprises (MSMEs) remain other key challenges.

The external environment, too, remains full of challenges that are playing out on the domestic economy. Global growth remains muted, keeping demand for Indian exports subdued. Two wars continue to wage in different parts of the world and any escalation of the conflict in the Middle East could potentially tip the scales on India’s crude oil supplies. In the US, President-elect Donald Trump is set to be sworn in on January 20, 2025, and his policies on not only tariff but other economic issues could have a direct impact on India in terms of exports as well as inflation and the value of the rupee vis-à-vis the US dollar. The rupee has already breached 86 to a dollar and concerns remain about further depreciation that could possibly lead to imported inflation.

In this backdrop, Sitharaman will have to walk the tightrope and ensure that the Budget pays adequate heed to each of these challenges and balances the various interests and calls for higher allocations and tax relief.

With the Budget set to be presented on February 1, the Finance Minister and her team of officials in North Block have got down to the nitty-gritty and the nuances of the Budget-making process. They have suggestions and recommendations galore after holding several rounds of inter-ministerial parleys and pre-Budget in-person consultations with more than a 100 invitees across nine stakeholder groups that includes industrialists, exporters, labour leaders and economists to name a few. Prime Minister Narendra Modi, too, has met economists as part of pre-Budget consultations and ultimately, the Budget would reflect his inputs and policy focus as well.

Boosting growth, Lifting demand

While the fundamentals of the economy have remained strong, a key concern has been slowing GDP growth that eased to a less-than-anticipated 5.4% of the GDP in Q2FY25. The second half of the fiscal is seen to do a tad better but the economy is estimated to grow at less than 7% for the first time in four years and growth prospects for FY26 also seem to have dimmed somewhat.

Most economists are now conservative on their GDP growth forecast for FY26 but believe that inflationary pressures could ease with better rains. However, almost all have called for measures to boost growth as well as lift private demand, especially as urban consumption is seen to have moderated in recent months. With global conditions remaining uncertain, domestic demand would have to be the main engine of growth, they note.

Rajani Sinha, Chief Economist at CareEdge Ratings, believes that the 5.4% GDP growth in the second quarter was a blip, and growth is set to pick up from the third quarter. The agency has estimated GDP growth of 6.7% in FY26. “While Q2FY25 GDP growth was the bottom of the barrel hopefully, one cannot ignore the fact that economic growth seems to be moderating,” she underlines. But she points out that there is a need to boost consumer spending and sentiment as India is largely a consumption-led economy. There has not been any direct boost to consumer spending post Covid, she points out.

Rumki Majumdar, Economist at Deloitte India, says the agency expects a stronger FY26, with GDP growth ranging from 6.7% to 7.3%. “Risks are to the upside as we expect some policy certainties around trade and investment in the West after six to seven months into the year,” she points out.

India’s services sector and exports have done exceptionally well amid uncertainties and Majumdar believes that given its significance to overall GDP and urban income and employment, robust performance in this sector will likely help lift urban demand and boost urban consumption. “Strong agricultural output will sustain rural demand that has been doing well over the past two quarters,” she says.

High frequency indicators have shown a mixed picture in recent months and the festive season failed to spark sales. Commentary by companies has also reflected a more subdued consumer experience and the middle class has been calling out for relief on taxation.

Private final consumption expenditure is seen to be the silver lining and is estimated to grow by 7.3% in FY25 from 4% in FY24, per the First Advance Estimates, with good rains boosting rural sentiment and demand. While private consumption growth has improved from the previous quarters, it is yet to see all-round improvement and moderating urban consumption demand is seen to be the next challenge. (See charts).

Madan Sabnavis, Chief Economist at Bank of Baroda, however, is more optimistic and believes that the economy is fairly well-placed for growth in FY26 and would in all probability grow well above 7%. “Our optimism for FY26 stems from the fact that we believe that the two challenges to the economy this fiscal—of consumption and investment—will be reversed assuming there is a normal monsoon. This will also help inflation taper with both food inflation easing and a good rabi crop,” he elaborates. This easing of retail or CPI inflation, which the bank has pegged at an average 4.5% for FY26 with core inflation at 4%, will also help turn around consumer sentiment and help boost consumption demand, he says.

Measures to boost consumption have been a key recommendation by several industry chambers in their pre-Budget consultations with the government. Chandrajit Banerjee, Director General of Confederation of Indian Industry (CII), notes that considering the strong fundamentals of the Indian economy and continuing global uncertainty, the industry chamber submitted its key suggestions for Union Budget 2025-26 focussed on continued emphasis on public investment, measures to improve consumption, suggestions to increase employment, continuation of next-gen reforms and improving overall productivity.

In a pre-Budget meeting with the Finance Minister, CII has suggested several measures to boost consumption, including reduction of the excise duty on fuel to reduce overall inflation and boost disposable incomes; lowering marginal tax rates for personal income up to Rs 20 lakh per annum to trigger the virtuous cycle of consumption, higher growth and higher tax revenue; and increasing the minimum wage rate under MGNREGS from Rs 267 per day in FY24 to Rs 375 as suggested by the Expert Committee on Fixing National Minimum Wage.

Focus on capex

The government is also expected to keep the pedal on capital expenditure in the Budget, since it has become the dominant driver of economic growth in recent years. The allocated capex of Rs 11.1 lakh crore for FY25 may not be spent fully this fiscal due to the General Elections and the late presentation and passage of the Union Budget 2024-25 in July and August 2024 but it is unlikely to deter the Centre much in FY26, especially as private investments are still stumbling in their recovery. According to the First Advance Estimates, gross fixed capital formation—a bellwether for investments in the economy—is estimated to expand by 6.4% this fiscal from 9% in the last fiscal.

Sources indicate that the outlay for capital expenditure in FY26 may not increase very significantly from the record Rs 11.1 lakh crore allocated this fiscal, but the quality of expenditure will be a key monitorable. According to data from the government’s Controller General of Accounts (CGA), the Centre’s capex was Rs 5.13 lakh between April and November 2024 and experts believe that it will be an uphill task to meet the full fiscal target.

Sabnavis notes the Budget is likely to continue the focus on capital expenditure, but it may announce some special measures for sectors such as irrigation and climate risks through higher capex outlays for this. “The focus on railways and roads in terms of capex will also continue,” he says.

State governments, which are allocated Rs 1.5 lakh crore of interest-free capex loans, are likely to be prodded to invest more in infrastructure creation, and the limit may be enhanced. The states have requested the Centre to enhance the outlay under the Scheme for Special Assistance to States for Capital Investment as it leads to construction of crucial capital assets in the states; the issue was also discussed at the FM’s pre-Budget meeting with states in Jaisalmer in late December.

D.K. Srivastava, Chief Policy Advisor at consultancy major EY India, in a note pointed out that in the medium term, India’s real GDP growth could be 6.5% per year provided the Government of India (GoI) accelerates its capital expenditure growth in the remaining part of FY25 and comes up with a medium-term investment pipeline with participation from the GoI and state governments, their respective public sector entities, and the private corporate sector.

Srivastava has called for a recast of the earlier 2019 National Infrastructure Pipeline (NIP) for a period extending up to 2030 with revised targets for the priority sectors, including roads, AMRUT, smart cities, railways, power, renewable energy. “Investment targets for all the three major investors, namely GoI and state governments and their respective public sector undertakings, and private corporate sector should be recast after evaluating their performance in financing the earlier NIP,” he said.

Together, the GoI and the state governments should ensure a minimum growth of capital expenditure allocated towards infrastructure of 6% of GDP each year over a five-year period. This implies driving their revenue deficits to near zero, Srivastava said.

Fiscal management

The Centre’s fiscal position seems to be the silver lining in the current stormy skies with the fiscal deficit seen to be a tad better than the estimated 4.9% of the GDP in FY25. The deficit target for FY26 is seen to be below 4.5% of the GDP in line with the fiscal consolidation road map while ensuring that there remains more than sufficient room for all expenditure requirements.

Sabnavis expects the fiscal deficit for FY26 to be about 4.3-4.4% with nominal GDP growth at 11%. “In FY25, the fiscal deficit may do slightly better than the targeted 4.9% given the huge dividend transfer from the RBI and better GST revenues as well as some savings from capex,” he says.

Tax and non-tax revenues are seen to do well both in the current and next fiscal but in a break from the past, the Centre may depend more on dividends from public sector enterprises rather than straight off disinvestment receipts in FY26.

This trend is already visible in FY25. Dividend receipts from central public sector enterprises (CPSEs) have amounted to Rs 48,375.77 crore while the proceeds from disinvestment amount to Rs 8,625 crore. For FY25, the Centre has estimated receipts from dividends at Rs 56,000 crore, which is set to be exceeded. With the new dividend policy in place under which each CPSE would be expected to pay a minimum annual dividend of 30% of profit after tax or 4% of its net worth, dividends are likely to continue as a rich revenue source for the Centre in FY26 as well.

Meanwhile, the Rs 50,000 crore from “miscellaneous capital receipts” set in Budget 2024-25 as an umbrella term for proceeds from disinvestment and asset monetisation is unlikely to be achieved. But in FY26, the big-ticket privatisation of IDBI Bank is set to finally reach culmination. A string of small disinvestments through offers for sale is also seen to take place in the next fiscal and industry and experts are hoping for some big bang stake sale announcements in FY26.

Focus on reforms

Not just big bang reforms, but even small structural ones for ease of doing business and deregulation are likely to continue along with the focus on job creation and employment and skilling. Experts believe that reforms in whatever form they come will help bolster the growth engine.

The Union Budget 2025-26 will likely continue to focus on the themes of skilling and employment creation that were taken up in the Interim Budget 2024-25 with specific measures for digital upskilling of the workforce, notes Majumdar of Deloitte, adding that measures for further digitisation of public services to ensure financial inclusion are likely to be the other focus of the Budget.

Sinha of CareEdge highlights that the other important priority for the government should be to give a push to the industrial corridors that were proposed in this Budget. “This model worked for several East Asian countries and could give a significant boost to manufacturing in India as well. Each corridor should be developed as a sector-specific cluster that is labour intensive and has export potential and an ecosystem should be developed around it,” she says.

CII has suggested that to facilitate MSMEs, the government should upgrade the Udyam Registration Portal into ‘a single one-stop’ platform for MSME registration, compliances of various regulations and procedures, besides being linked with GeM, TReDS and SAMADHAAN portals. MSMEs being the engine of employment growth, this is a key move.

Industry body FICCI has called for implementing next-generation reforms in the factor market—a place where businesses buy and sell the resources they need to produce goods and services—that would create inter-state institutional platforms. “Many of the next generation reforms lie in the state’s concurrent domains and require consensus building to take them forward. Inter-state institutional platforms on the lines of the GST Council can be created—especially for reforms in the areas of land, labour and power,” it underlined.

Some proposed reforms and measures announced in Budget 2024-25 are also gaining momentum and could see greater play in the coming fiscal. The PM Internship Scheme is likely to be rolled out fully in 2025-26 while all 36 states and Union Territories are expected to complete harmonisation and pre-publication of draft rules for notification by March 31, 2025, laying the road for actual implementation of the Labour Codes. There is also expectation that the pending issue of social security to the country’s teaming gig workers could be taken up in the Budget.

The Budget is also likely to review customs duty rates and exemptions on several items and push through some measures for simplification of direct tax policies on segments like tax deducted at source. But the revamp of the I-T Act, 1961, may get pushed back. The FM had also announced a new road map for fiscal consolidation from 2026-27 under which the fiscal deficit each year will be maintained in such a way that the central government’s debt to GDP ratio declines. While the ministry has had some initial discussions on it, whether it sees a mention in the Budget is to be seen.

For now, one of the biggest monitorables is how Trump’s tariff policies will impact India’s exports, a point that industry chambers and exporters have raised. An across-the-board tariff hike would leave India largely unscathed while a hike only on Chinese imports could potentially benefit India. But the going may not be as simple or easy, warn experts.

For Sitharaman, navigating each of these challenges will not be an easy task. Her formidable experience—along with some nimble policy crafting—could, however, help turn the tides and help her balance the need to boost growth and consumption while keeping inflation under check.