This is an archive article published on January 22, 2025

‘Expect a fine balance of boosting growth and employment with continued fiscal prudence’: Siddhartha Sanyal

Employment generation remains the most critical aspect of India’s long-term growth strategy, with 133 million people entering the working-age population by 2050.

5 min readJan 22, 2025 07:20 AM IST First published on: Jan 22, 2025 at 04:00 AM IST

By Siddhartha Sanyal

The backdrop of the upcoming Union Budget is a complicated one with rapidly evolving geopolitical and geo-economic factors. Moreover, domestic growth momentum has also slowed in recent months. The government now expects FY25 GDP growth to slow down to a four-year low of 6.4 per cent from 8.2 per cent in FY24, even though India remains the fastest-growing large economy.

The upcoming Budget is expected to be a balanced approach to boost short-term demand while providing a roadmap for incentivising long-term growth and employment generation, including at the bottom-end of the pyramid, by targeting key areas like labour intensive manufacturing, MSMEs, agriculture productivity, renewable energy, digital innovation and supply infrastructure.

Notwithstanding a rise in general government debt as a percentage of GDP to tackle the Covid-19 induced slowdown, the government has been resolute in maintaining fiscal prudence, which is reflected in the steady reduction of the Centre’s fiscal deficit as a percentage of GDP. Since 2022, the rise in gross debt position as a percentage of GDP has been lower for India as compared to most of its peers viz. China, Thailand, Malaysia, Russia, Brazil and South Korea. India’s general government debt at about 84 per cent of GDP is materially lower than most of the advanced economies such as the US, UK, Spain, Japan, France, etc. which run general government debts higher than 100 per cent of GDP.

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The government’s capital expenditure grew at an impressive CAGR of 22 per cent between FY21-24 and will likely stay in focus in FY26 also. However, private capex, which had been subdued in recent years, will continue to hinge critically on momentum of domestic demand. To support states’ capex, the Central government may increase outlay of special assistance to states for capex.

The government may also consider a comprehensive industrial and manufacturing policy to boost industrial capacity and make Indian manufacturing more competitive by promoting new-age technologies. There is a case to review the existing PLI scheme which is currently assigned to 14 sectors to explore possibility of further expansion and introduce targeted modifications given the possible reshaping of global order during Trump 2.0.

Employment generation remains the most critical aspect of India’s long-term growth strategy, with 133 million people entering the working-age population by 2050. Continued thrust in policies involving support to employment-intensive sectors such as construction, tourism and textiles, enhancement of women’s participation in workforce would be of prime importance. The government’s continued thrust on skill development and vocational training is also a key positive in this regard.

MSME sector, which employs about 50 million people and contributes nearly half of India’s exports, remains critical to the Indian growth narrative. The lifeblood of the MSME sector is access to timely and affordable credit and government’s measures like enhanced Rs 9,000 crore Credit Guarantee Scheme corpus have aided the sector. One expects the government to stay focused on improving timely credit availability to stressed MSMEs — one such way could be improving on credit targeting by leveraging its impressive digital public infrastructure (DPI) innovations. Export incentives can also be enhanced by the expansion of PLI schemes and improving access to key inputs.

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As regards agriculture and allied activities, a key challenge faced by the sector is rising frequency and intensity of weather aberrations, which often lead to severe financial loss and indebtedness. The Budget may consider providing a credit guarantee scheme for agriculture and allied activities with higher corpus from the government to offer collateral-free credit facility by eligible lending institutions to boost the farm sector.

To support rural consumption, there may be an increase in PM-Kisan Samman Nidhi from the current amount of Rs 6,000 per year to land holding farmer families. There may be some tax relief to lower income to boost financial savings. With rising premiumisation of real estate, thrust on affordable housing remains critical to bridge supply-demand gap in housing.

In sum, the government looks set to meet its FY25 fiscal deficit target of 4.9 per cent of GDP, if not undershoot it by 10-20 basis points, even though nominal GDP growth in FY25 may be lower than budgeted. The Budget’s endeavor will also be directed towards keeping fiscal deficit at such level to ensure a declining trend for Central government debt. Overall, one expects the Union Budget to adopt a balanced and nuanced stance — it will likely seek to propel near-term consumption through targeted redistribution and nudge, likely without any steep increase in outlay for welfare schemes, and without diluting the focus on fiscal prudence and infrastructure focus for long-term growth.

The author thanks Sudarshan Bhattacharjee and Gaurav Mukherjee for assistance. Views are personal