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The Indian economy, while demonstrating remarkable resilience post-pandemic with an average annual growth of 8.3% over the last three years, is now facing significant challenges. These challenges stem from a weakening base effect, coupled with weak consumption growth, high household indebtedness, elevated food inflation, sluggish capital formation, and stress within the MSME sector. The first advance estimate of GDP for 2024-25 reflects this slowdown, projecting a reduced growth rate of 6.4%. External factors, including rising trade and geopolitical tensions, further complicate the economic outlook. This complex scenario necessitates a delicate balancing act for the Finance Minister in Budget 2025. The need to stimulate economic activity through continued government spending must be weighed against the potential inflationary consequences and the imperative to adhere to the fiscal prudence roadmap.
The analysis projects a net tax revenue of INR 25.4 trillion for FY25, slightly lower than the budget estimate. Non-tax revenue is expected to exceed the budget estimate, while non-debt capital receipts are projected to be significantly lower due to slow disinvestment. Total non-debt receipts are anticipated to be 1% below the budget estimate. Revenue expenditure is expected to be 1.5% higher than the budget estimate, primarily due to higher proportional spending and lower net cash outgo under supplementary demands. Capital expenditure, while showing an increase in Q2, lags behind the previous year's performance and is projected to be in the range of INR 9 to 9.5 trillion for FY25.
The projected fiscal deficit for FY25 is estimated to be between 4.6% and 4.8% of GDP. Looking ahead to FY26, the Tax/GDP ratio is expected to improve to 12%, leading to a projected net tax revenue of INR 28.7 trillion, a 13% increase compared to FY24. Non-tax revenue is anticipated to grow by 7%, while non-debt capital receipts are estimated at INR 0.81 trillion. This would bring total non-debt receipts to INR 35.8 trillion, a 12.9% rise over FY24. Revenue expenditure is expected to increase by 5-8%, with the government likely avoiding new populist schemes. Capital expenditure is expected to be in the range of INR 11.2 to 12.3 trillion for FY26, aiming for a fiscal deficit of 4.5% of GDP. This would result in a significant growth rate for capex, ranging from 18% to 37%, however, this is optically significant as capex utilisation in FY25 will likely be below the budget.
Given the fiscal constraints and the need to prevent inflationary pressures, the upcoming Union Budget 2025 is likely to prioritize fiscal prudence over populist measures. The government possesses a limited fiscal headroom, approximately INR 90 billion, which could potentially be utilized for targeted tax relief or increased cash transfers to farmers. Any significant populist initiatives would likely compromise capital expenditure. Considering past trends and the government's commitment to fiscal consolidation, it's anticipated that fiscal prudence will prevail in Budget FY25. The Finance Minister is expected to rely on monetary policy support to stimulate private capital expenditure, having adhered to fiscal consolidation.
The economic projections for India highlight a need for careful navigation of competing priorities. While the economy has shown resilience, the current headwinds necessitate a cautious approach to budgeting. The emphasis on fiscal prudence suggests a strategic focus on long-term sustainable growth, potentially prioritizing investments in infrastructure and economic reforms over short-term populist measures. The success of this strategy will depend on the government’s ability to effectively manage inflation and stimulate private sector investment. The projected growth numbers and fiscal estimates paint a picture of an economy seeking to balance stability with growth, a delicate act requiring careful economic management.