Will the Government's Growth Gamble in Union Budget 2025-26 pay off?

The Budget for 2025-26 is poised to be a defining moment for India’s economy, which is projected to grow at its slowest pace in four years-6.4% in the current fiscal year ending March 31. Crucially, the Economic Survey, tabled a day before the Budget, forecasts growth between 6.3% and 6.8% next year.

Against this backdrop, Finance Minister Nirmala Sitharaman’s eighth Budget follows a multi-pronged approach to reignite economic momentum. As noted by Morgan Stanley Research, the Budget strikes a delicate balance between supporting growth and maintaining fiscal prudence. The first full-year Budget of Prime Minister Narendra Modi’s third term seeks to accelerate growth by boosting disposable incomes for salaried taxpayers, with the expectation that urban Indians will increase consumption. Another crucial pillar is capex-driven growth, including Rs 1.5 lakh crore in 50-year interest-free loans allocated to states for capital expenditure and structural reforms. At the same time, the Budget remains committed to fiscal discipline, targeting a 4.4% fiscal deficit next year.

This focus—stimulating consumption and continuing capex-while staying on the fiscal consolidation path, is expected to lay the groundwork for economic revival. But will these measures be enough to push growth back to 8%? As Macquarie Equity Research cautions, while tax cuts provide a short-term boost, there is still “a long way to go to achieve Viksit Bharat.” That’s the key question Surabhi explores in this edition’s lead story. Elsewhere, Teena Jain Kaushal delves into why 10 million taxpayers are celebrating the much-anticipated rebate. Other reforms, coupled with the introduction of a simplified tax code to replace the 1961 law may make 2025 a landmark year in India’s tax history. Meanwhile, calls for rationalising the GST to support consumption continue to echo.

Sitharaman’s Budget has been complemented by the Reserve Bank of India’s decision to cut the policy repo rate by 25 basis points—the first reduction in five years. In just a week, India’s fiscal and monetary policies have aligned to drive consumption. Will this trigger a spending surge strong enough to revive growth? Economists say the answer hinges on urban consumption. Goldman Sachs Portfolio Strategy Research highlights the tax rebate “increases annual disposable income by Rs 80,000-1 lakh for 13 million consumers,” adding the announcements are “positive for consumer-retail-oriented lenders through deleveraging of household balance sheets, and urban-discretionary consumption categories like quick-service restaurants, food aggregators, fashion, footwear, travel, urban-skewed staples, durables, and two-wheelers and affordable cars.”

While tax cuts can boost disposable income, some beneficiaries may opt to save rather than spend, potentially tempering the intended stimulus to consumption. The next couple of quarters should provide indications of the impact. If urban India experiences a notable uptick in spending, growth could recover. However, if consumers remain cautious, the impact may be subdued.