 |
|
India's Finance Minister Nirmala Sitharaman presented Budget 2025, a fiscally prudent plan lauded for its tax benefits aimed at the middle class. This tax relief, a significant Rs 1 lakh crore boost under the new tax regime, is intended to stimulate consumption and counter the slowdown in economic growth. For the past three quarters, urban consumer demand has faltered due to inflationary pressures, sluggish wage growth, and escalating housing costs. While the budget aims to alleviate this by increasing disposable income, the effectiveness of this measure remains to be seen. The FMCG sector witnessed a mere 0.5% growth in urban markets during the December quarter, highlighting the persistent challenge in boosting consumer spending.
The budget's impact on the economy is expected to be multifaceted. The zero tax levy for income up to ₹12 lakh, coupled with raising the basic exemption limit, directly benefits a significant portion of the population. The government projects that approximately one million assessees, previously burdened by annual tax payments ranging from ₹20,000 to ₹80,000, will now be exempt. High-income earners will also see substantial absolute tax savings, although the percentage reduction will be comparatively lower. This tax relief is anticipated to not only boost consumption but also encourage increased savings. The RBI's ability to comfortably cut interest rates is also enhanced by the government's commitment to fiscal consolidation and stable borrowings.
However, the positive outlook presented by the budget is significantly overshadowed by the looming threat of external pressures, primarily stemming from US President Donald Trump's imposition of tariffs. Trump's decision to impose tariffs on imports from Mexico, Canada, and China, escalating into a trade war, casts a long shadow over India's economic prospects. India and Brazil are also potential targets of Trump's protectionist measures, adding to the uncertainty. While Sitharaman's budget incorporated some concessions, such as reducing import duties on premium motorcycles to appease Trump's demands, it largely avoided direct confrontation with the tariff threat.
The absence of direct measures to counter Trump's tariffs in the budget stems from the anticipation of a trade negotiation between India and the US. A limited trade deal is expected to feature prominently during Prime Minister Modi's visit to Washington DC in February. This deal is envisioned to include tariff concessions on selected goods and broader agreements on investment. The Indian commerce and industry ministry is actively seeking input from companies to strategically develop India's export strategy for the US market. Experts suggest focusing on reducing tariffs on upscale American goods to initiate serious negotiations for a comprehensive trade agreement encompassing trade, technology, and investment.
The potential trade deal aims to resolve existing trade friction between the two countries, including long-standing issues in agriculture and medical devices. It builds on the progress made during Trump's first term, leveraging the momentum established in the joint statement issued during Trump's visit to India in February 2020. A successful trade agreement, even a partial one, is expected to provide expanded market access for both Indian and US companies, simultaneously serving as a confidence booster for both economies. The outcome of Modi's upcoming visit will determine the extent to which both parties can achieve a mutually beneficial agreement and effectively navigate the complex trade landscape dominated by Trump's protectionist policies. The success of Sitharaman's economic initiatives, therefore, hinges significantly on the ability of Prime Minister Modi to effectively address the external challenges posed by Trump's tariffs.
The situation underscores the complex interplay between domestic economic policies and global trade dynamics. While the budget's focus on boosting domestic consumption is a crucial step towards sustainable economic growth, the external threats posed by protectionist trade policies remain a significant obstacle. The success of India's economic trajectory in the coming years will depend heavily on the outcome of the upcoming trade negotiations and the ability of the government to navigate the challenging geopolitical landscape. The current situation highlights the increasing interdependence of national economies and the significant impact of global trade policies on individual nations.
Source: Sitharaman has done her part. Now, it's over to Modi