Analysis of India's Fiscal Policy and Economic Outlook
The Union Budget for 2025-26 was presented against a backdrop of economic challenges, characterized by declining growth, a falling savings rate, slower corporate earnings, and rising household debt. This necessitated a calibration of fiscal policies to support growth while maintaining fiscal and macroeconomic stability.
Key Objectives and Strategies of the Union Budget
- Fiscal Consolidation: The budget aims to maintain fiscal responsibility, with the fiscal deficit expected to be 4.4% of GDP. This includes significant revisions in income tax slabs to provide relief to the middle class.
- Reform Initiatives: The budget outlines reforms in areas such as taxation, urban development, mining, financial sector, power, and regulatory frameworks to spur growth.
- Growth Catalysts: Emphasis on deregulation of sectors, predominantly state-controlled, suggesting a need for Centre-state coordination for smooth implementation of reforms.
Fiscal Measures and Economic Implications
- Income tax reforms aim to increase disposable income and stimulate growth.
- Fiscal expansion involves providing relief to lower-income groups through budgetary expenditures.
- Despite moderate fiscal expansion, the primary focus remains on fiscal consolidation.
Macroeconomic Outlook
- Nominal GDP growth is projected at 10.1%, assuming real growth of 6% and inflation at 4% or less.
- Challenges include reducing inflation to achieve projected nominal growth.
- India's economic resilience is noted, with a focus on maintaining its status as a fast-growing economy.
Household Financial Concerns
- Rising household debt post-Covid is a concern, though still lower than in developed economies.
- Increase in personal loans indicates financial stress among households.
- Shift in savings from safe to speculative investments poses macroeconomic risks.
Addressing household debt and encouraging safe savings are necessary for greater financial stability in the face of global shocks.
Policy Recommendations
- The need for policies beyond the budget, encompassing fiscal, monetary, and financial-sector strategies, is critical.
- Encouraging household savings and reducing financialisation are key to navigating economic uncertainties.
The analysis underscores the importance of a balanced fiscal approach in promoting growth, ensuring fiscal stability, and addressing household financial stress in India.
