Budget 2025 see higher focus on government capex
Widespread growing concern is seen among economists, government and policy makers about the subdued economic growth in India. The financial year of 2024-2025 has faced a slowdown in economic growth as well as government capital expenditure (Capex).
Reasons for Economic slowdown
According to economists, the reason for a decrease in public expenditures is due to the General Elections of 2024 and also increase in social expenditure such as welfare programs, social services and subsidies, etc. One of the other reasons for the slowdown is the delayed final budget for the financial year 2024-2025. It led to a fall in cumulative capex until the month of October 2024.
According to some analysts, it is due to the government’s change in priority in its third term as it has to focus on balancing subsidies given for the purpose of improvement of rural conditions and capex for the purpose of economic growth. Also subdued growth in consumption level has led to a burden on the government to increase social expenditure in order to curb it.
The report of Sanford C Bernstein, an international brokerage and research firm states that the Indian government was able to secure only 37 percent of its capex target in the financial year 2025 till now. On the other hand, it was able to meet 56 percent of its subsidies target in the initial six months by the month of September only. The report further said that it is in the best interest of India and its economy to focus on government capex in 2025 even without reducing subsidies.
Historically speaking, government capex and growth are strongly correlated to each other. Taking the example of the pandemic itself, the increase in government expenditure played a critical role in improving economic growth.
The current public spending is required to be increased in sectors such as roads, railways, defence, airports and affordable housing. At the same time, encouraging private capex is important as well in industries such as steel, oil, gas, cement, and power.
The Berstein report states that when government and private capex moves together, it would certainly lead to a booming phase in the economy and markets.
Emphasis on government capex by CII
The President of Confederation of Indian Industry (CII) Sanjiv Puri states that a 25 percent increase in government capital expenditure, personal income tax relief, and deliberated measures taken to encourage manufacturing activity and integration of domestic industries into global value chains will help to provide the required growth momentum. He is the chairman and managing director of ITC ltd.
He also demanded a cut in interest rate in the budget. He advised that a significant contraction in fiscal could adversely affect investments. He further states that public capex is crucial in enhancing the level of competitiveness in the economy and helps to provide a push for growth in the economy. The government capex has its own economic mutlipliers. The CII has recommended a 12 percent increase in the government’s capex for the budget of financial year 2025-2026 compared to Rs. 11.11 lakh budget for the financial year 2025.
According to him, the gross domestic product (GDP) estimated at 6.4 percent is a four-year low GDP for the financial year 2025 is a fairly good number. As the GDP figures needed to be viewed by considering dynamic situations around the world. The industry body anticipates economic growth to rebound to 7 percent in the financial year. He states consumption is the biggest contributor in GDP. Also, private investment cannot alone act as a key for economic transformation.
Emphasis on government capex by EY India
The global consulting and professional services firm Ernst & Young India also advocated focusing on public capex in the budget 2025. According to EY India, the Indian economy should focus on crucial areas such as increase in public expenditure, reduction in fiscal deficit, promoting private sector improvement and also introduction of tax reforms to stimulate business innovation.
The government should particularly focus on small and medium enterprises (SMEs) and also removing complexities in tax compliance for the purpose of encouraging business activities. To achieve sustainable growth in the financial year 2025-26, it should focus on lowering the fiscal deficit to around 4.5 percent of GDP. It should also focus on decreasing debt-to-GDP ratio which is currently around 54.4 percent and 40 percent above the target of FRBM.
To increase private sector investment, interest rates should be progressively reduced. To gain economic growth and increase urban demand, employment schemes should be expedited
The Budget for the financial year 2025-26 will be formally present on 1st February, 2025.
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