Overview
Following the Covid-19 pandemic, many countries in the world suffered from aggressive contractionary monetary policy, high inflation levels, and constant geopolitical issues. In the midst of this scenario, India’s growth was a silver lining. The reason for this robust growth was government expenditure on the country’ infrastructure was unparalleled. It resulted in India recording the highest growth levels for each quarter compared to other major countries in the world. This trend went on for many quarters till the second quarter of the financial year 2025.

India recorded a 5.4 percent growth on a year-on-year basis in the September quarter of the financial year 2024-25. It was the most moderate growth in the period of the last two years. The Finance Ministry of India and Reserve Bank of India stated that the slump in growth is just temporary in nature and not a long-term shift of the economy towards moderate growth levels. Despite this, the scenario shown by the earning reports of the third quarter of non-financial firms was falling for the third quarter in a row. The only exception to this pattern was some of the big companies.

Due to this gloomy situation prevailing in the market, different segments in the economy are expecting a thrust from the Union budget for the economy of the country.

Factors needed for the economic growth
To boost economic growth, a country needs to fulfill the four factors of GDP which is investment from both public and private sector, net export levels (difference between exports and imports) and consumption.

After the Pandemic, the economic growth in India is strongly pushed by government expenditure. However, channels of government expenditure have crossed way beyond their capacity. In recent times, government expenditure is declining which has resulted in a decline in growth levels. In the second quarter of financial year 2025, the growth in investment by the government was just 4.4 percent. Looking at this situation, it is time for private sector investment to step in to promote economic growth in the country.

The export levels in the country are suffering from moderate growth. In the second quarter of the financial year 2025, the export growth fell to 2.8 percent year-on-year which is the most significant hindrance to economic growth. In contrast to this, the growth of consumption level in the same quarter was 6 percent year-on-year increasing. Also, the anticipated household consumption growth for this financial year is about 7.2 percent. In India, household consumption levels have more than half of the share in the growth of its GDP.

Despite this good situation in consumption levels, it certainly has its own issues too. After the Covid-19, the urban demand was high for a long period of time and now it has lost its breath. While, the major part of consumption level is contributed by increasing rural expenditure levels in the latest quarters. The rural expense has increased due to factors such as some government schemes (like MGNREGA) and favorable monsoon season.

To have robust economic growth in India, the government needs to encourage private investment, a push to export levels and strong urban demand.

Role of Budget
Tax relief is one of the important measures that the government of India is anticipated to take in order to encourage urban demand in the country. The contribution of personal income tax was about 53 percent in the total direct tax collection of the government in the financial year 2024. It showed that people pay more taxes compared to tax paid by companies. It is also important to consider the truth that about three percent of the population in the country gives taxes. It is quite concerning in terms of tax pressure on the people paying taxes. Taking this scenario in consideration, it is anticipated that the government will raise the exemption limit on earnings, providing high standard deduction, adoption of medical insurance deduction (Section 80D Deduction) in new tax policy, increase the limits on investments and saving on which tax deduction is allowed (Section 80C Limit), and make income tax brackets fairer.

In the case of private investment, the investment levels are quite inconsistent. Despite this, many new technology industries are growing with the help of government actions. This kind of support is anticipated to remain in future as well. However, government stimulus is constantly changing. For instance, initially the government of India was focusing on incentivising swapping of batteries but now it is focusing on creating more charging infrastructure. It is difficult to identify which incentive will perform well in the economy. However, it is important to understand that all the attempts of the government are focused on promoting these new technology industries.

Apart from this, many industries in the country are anticipating a fall in interest rates in the month of February and also rise in demand levels. In present times, these industries are working with high production capacity. They have high cash levels but not using it to invest in new plans. The reason for high cash is raised through various channels, particularly through IPOs in the year 2024. When consumption levels in the country will be raised then companies will start to use their cash. Also, they will go for loans in case of favorable stock market situations and fall in interest rate in the economy. However, these actions of the industries rely on the condition that consumption demand needs to rise.

Focus on fiscal consolidation
The government of India needs to focus on fiscal consolidation. In the current financial year, it should keep the fiscal deficit in the range of 4.9 percent and below 4.5 percent in the upcoming financial year. It would lead to financial reliability in the current situation of uncertainty.

In conclusion, the government of India needs to focus on tax reliefs and investment leading to creation of economic growth in the long term, along with focus on fiscal consolidation.

Overview
Since governments in both developed and emerging nations provided varying degrees of fiscal stimulus following the Covid epidemic, sovereign debt as a percentage of GDP has been a hot topic of discussion worldwide. In developed countries like the US, the debt-to-GDP ratio has risen to unmanageable levels notwithstanding the rollback of stimulus measures. India’s ratio needs to be watched even though it is low when compared to its immediate developing market rivals.

FRBM Act target not achieved
According to Barclays, since the peak of the pandemic year, the central government debt to GDP ratio has remained at about 60%. That is significantly more than the 40 percent threshold set by the Fiscal Responsibility and Budget Management Act (FRBM) to be met by FY25.

The goal set by the FRBM Act was for the total debt of the central and state governments to reach 60% of GDP by 2024–2025, with the central government’s debt standing at 40%. Following the pandemic, the FRBM targets were halted, necessitating an increase in government spending to bolster the economy.

Fiscal Deficit to reduce Debt
In her budget address last year, Finance Minister Nirmala Sitharaman stated that starting in 2026–2027, the fiscal policy will aim for a fiscal deficit that would assist in the debt’s downward trajectory. Although no specific goals were stated, the idea is that the amount of government debt must decrease. After all, the current administration has repeatedly emphasized the importance of economic restraint and prudence.

To reduce debt to 40 percent of GDP from the present 57 percent is a tall task and is unlikely to be achieved in a handful of years. Indeed, the need to boost spending, be it capex or revenue towards slowing sectors, has emerged yet again. With the economy facing a cyclical slowdown, the pressure of the government has increased to lift consumption through measures that would force the government to forgo tax revenue.

External Debt on the rise
According to the Finance Ministry, India’s external debt increased 4.3% from June 2024 to $711.8 billion as of September of this year. The external debt was $637.1 billion at the end of September 2023.

According to India’s Quarterly External Debt Report, the country’s external debt was $711.8 billion in September 2024, $29.6 billion more than it was at the end of June 2024. Further the report highlights that the external debt to GDP ratio was 19.4% in September 2024 compared to 18.8% in June 2024. With a proportion of 53.4% of India’s external debt as of the end of September 2024, the US dollar-denominated debt was still the highest, followed by the Indian Rupee (31.2%), Japanese Yen (6.6%), SDR (5.0%), and Euro (3.0%).

It stated that both the general government’s and the non-government sector’s outstanding external debt rose from June 2024 to September-end 2024. According to the report, loans accounted for the highest portion of foreign debt (33.7%), followed by currency and deposits (23.1%), trade credit and advances (18.3%), and debt securities (17.2%). Further, debt servicing (principal repayments plus interest payments) accounted for 6.7% of current receipts at the end of September 2024, up from 6.6% in June 2024.

Market Opinion
Speaking about the impending Union Budget and India’s overall economic prospects, Nadir Godrej, Chairperson of Godrej Industries Group, says that although a budget deficit may appear worrisome in the near term, it need not be detrimental if it fosters growth. In an interview with Siddharth Zarabi, Editor of Business Today, at the World Economic Forum in Davos, he stated that the debt-to-GDP ratio is the most important indicator to keep an eye on since it shows the nation’s total debt in relation to its economic production.

According to Godrej, India’s debt-to-GDP ratio would improve and worries about the sustainability of its debt would be allayed if the country’s economic growth rate rose from the anticipated 6.7% to 9%. According to him, if a budget deficit is properly employed to spur growth, then a certain amount of it is acceptable.

Godrej emphasizes the value of government capital spending, despite the fact that it could seem excessive at first. According to him, even if these expenditures may appear high up front, they produce worthwhile assets (such as public facilities, energy infrastructure, and roads) that will pay off later on, increasing productivity and stimulating the economy. Government investment on infrastructure and other long-term initiatives that support the expansion of the economy in the future is referred to as capital expenditure.

Conclusion
What is heartening is that fiscal deficit is likely to reduce to 4.5 percent of GDP for FY26 but that is a job half done. Financing this deficit in a way that does not require the government to borrow large amounts from the bond market is critical towards reducing the debt load. This is where it gets tricky for the budget.