Opinion In Our Opinion: 5 things to watch out for in the Budget

The drivers of growth are weak. Private investment activity continues to remain depressed. As per CMIE, new project announcements have slowed down considerably. Even government capital expenditure, which has been driving investments in the economy over the past few years, is lower this year as compared to last year. The employment scenario has worsened. As per the periodic labour force survey data, while millions more are entering the workforce, more are now engaged in self-employment, either setting up one-man roadside shops or engaging in unpaid household work. Real wage growth continues to be subdued. The third quarter FMCG results indicate that private consumption remains weak, even as households are taking on more debt.

On the global front, while so far President Donald Trump has displayed restraint, the threat of tariffs looms large. Trump is now reported to have said that tariffs will be imposed on February 1. However, there is considerable uncertainty over how this will play out. Over the next few days, the US Federal Reserve will also hold a meeting. This will provide greater clarity on the trajectory of interest rates in the US. The 10-year US bond yield is at 4.61 per cent. The dollar index has, however, fallen in recent days, and is currently hovering around 107.5.

Against this backdrop, what are the five things to watch out for in the budget?

First, what does the budget assume the economy will grow at. The last two budgets had assumed a nominal GDP growth of 10.5 per cent. However, in 2023-24, actual growth was lower at 9.6 per cent, and this year, it has been pegged at 9.7 per cent. Thus, for two straight years, nominal GDP has grown at less than 10 per cent. If the economy settles into this lower growth trajectory, it will have implications for the government’s debt-deficit dynamics.

Second, will the government continue on the path of fiscal consolidation. In the Union Budget 2021-22, the finance minister had spelt out her intention to bring down the fiscal deficit below 4.5 per cent by 2025-26. In the last budget she reiterated this position. However, some are now arguing in favour of relaxing the pace of consolidation. This would give the government the space to increase its spending at a time when the underlying economic momentum is weak.

Further, in the last budget, the finance minister had also stated that the “endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP.” Greater clarity on this is required. Perhaps the government should provide a detailed medium term fiscal policy statement.

Third, what steps will the government take to facilitate private sector investments and job creation and boost household consumption.

The government has not only cut the corporate tax rate, but in recent years has also stepped up capital spending — its capex to GDP ratio has gone up from 1.7 per cent of GDP in 2019-20 to 3.4 per cent in 2024-25. However, this has failed to crowd in private sector investments, despite healthier corporate and bank balance sheets. The budget must take appropriate steps to boost private sector confidence. This will have knock on effects on job creation, household incomes and demand.

The labour market is weak. Data from PLFS shows that the work force participation rate has increased from 49.8 per cent in 2017-18 to 60.1 per cent in 2023-24 (ages 15 and above). However, over the same period, the share of the workforce engaged in self-employment has risen from 52.2 per cent to 58.4 per cent. In 2017-18, 44.1 per cent of workers were engaged in agriculture. In 2023-24, it stood at 46.1 per cent. As per a report in this paper, in rural areas, real wage growth was -0.4 per cent in the five years ending in 2023-24. In the first five months of this year, it was just 0.5 per cent.

Household demand remains subdued. In the third quarter, underlying volume growth for FMCG major HUL was flat. GST collections have moderated further. This slowdown in consumption has led to calls for lowering income tax rates. However, income tax cuts will impact only a small section of the labour force, and to what extent they can boost demand is debatable.

Fourth, will the budget signal a reexamination of the government’s approach to trade? Will it bring down tariffs, and shun protectionism? Will it embrace trade, and seek to facilitate the integration of Indian companies in global supply chains. And lastly, will it spell out a bold privatisation programme?

At the current juncture, bold steps are needed. A business as usual scenario will not suffice. The budget must clearly articulate a medium term strategy to address the structural impediments to growth.

Till next week,
Ishan