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India's upcoming 2025-26 budget carries immense weight, representing more than a mere accounting exercise; it's a statement of the government's economic vision. The global landscape presents significant headwinds: the ongoing Russia-Ukraine conflict, instability in West Asia, recent US election outcomes, and challenges within China all contribute to global economic uncertainty, directly impacting India's economic planning. Domestically, India faces a slowing economy, with the second quarter of 2024-25 showing a seven-quarter low of 5.4% growth, prompting the Reserve Bank of India (RBI) to lower its growth forecast. Persistent inflation, particularly in food prices, further complicates the situation, along with a depreciating rupee, equity market outflows, and volatile oil markets. The RBI's adjustments to the cash reserve ratio (CRR) reflect efforts to manage tightening liquidity.
The 2025-26 budget must prioritize three critical areas: Firstly, achieving sustained economic growth is paramount. To reach the 'Viksit Bharat' (Developed India) goal by 2047, India needs an 8% growth rate in nominal per capita dollar terms, translating to approximately 11-12% nominal GDP growth considering population and currency depreciation. While this aligns with past averages, sustaining this for two decades presents a substantial middle-income trap challenge. This requires a long-term vision transcending short-term economic fluctuations and strategic policy calibration to navigate global uncertainties and domestic challenges.
Secondly, addressing India's employment challenges is crucial, especially considering the connection between the labour market and international trade. India, a labour-abundant nation with an expanding workforce, paradoxically specializes in capital-intensive industries, contradicting the principle of comparative advantage. To generate high-quality employment, the budget should focus on sectors combining export potential and job creation, such as textiles, high-value agriculture, and assembly. While assembly faces concerns about low domestic value addition, achieving scale could significantly boost domestic value and employment. This requires securing stable positions within global value chains. The budget should allocate resources and create policies that incentivize investment and growth in these key sectors, while addressing the challenges inherent in transitioning to more labour-intensive industries and creating a supportive ecosystem for these sectors to flourish.
Thirdly, managing India's public finances is essential. Despite fiscal consolidation efforts and transparent budgetary frameworks, India's debt-to-GDP ratio remains higher than comparable economies. Nearly 40% of central government revenue goes towards debt servicing – significantly above the emerging market average of 10%. This necessitates careful deleveraging to improve sovereign ratings and create fiscal space for development initiatives. Establishing an independent Fiscal Council, as recommended by the FRBM Review Committee and the 15th Finance Commission, could enhance the credibility of India’s fiscal framework. Such a council would provide independent macroeconomic forecasts and monitor fiscal developments, contributing to more informed and responsible fiscal management. This independent oversight will help ensure long-term fiscal sustainability and provide greater confidence in India's economic future.
In conclusion, the 2025-26 budget presents a critical juncture for India. Achieving developed-nation status requires sustained macroeconomic and political stability, coupled with continued infrastructure investment. Success hinges on effective policy implementation; the budget must balance immediate challenges with long-term goals, fostering sustainable growth, job creation, and structural transformation. The emphasis should be on swift and efficient execution of policies and reforms. The decisions made now will shape India's development trajectory for the next two decades. The mantra must be 'implement, implement, implement'— transforming vision into reality through decisive action and efficient execution.
Source: India’s 2025-26 budget should aim to engineer an economic transformation