In present times, India is facing the issue of moderate economic growth and global tensions. In this scenario, the upcoming budget focuses on keeping the same fiscal strategy which was implemented for the previous four years. The policy also focuses on the strategy of fiscal consolidation and at the same time keeping budget expenditure higher than before pandemic expenditure levels. Further, it resolves to expand capex rapidly than expenditure of revenue levels. It will help in reducing the fiscal deficit in the economy at a moderate rate. However, the reduction in fiscal deficit continues to be higher than the target set by FRBM. This will aid in public investments leading to growth in the medium term.

Factors helping reduction in fiscal deficit
Following the financial year 2021-2022, the capital expenditure has played a crucial role in improving the GDP of the country. The factors such as growth in tax collections on personal incomes, big dividends of RBI, and expansion of GST revenue will aid in contracting the fiscal deficit.

There is a crucial requirement of fiscal consolidation in order to achieve lower debt levels and its costs, and also leading to expenditure in productive areas.

Need for high capex
India has a long term goal of becoming a developed nation in the year 2047. To achieve this, it aims to develop its infrastructures in terms of railways, highways, clean energy aims for creating an energy generation capacity of 500 GWs in the year 2030, and a strong agricultural sector in terms of better climate risk management and storage facilities. With the help of the PLI scheme, it focuses on expansion of local manufacturing activities in key sectors in the country. These are the reasons that the outline of the budget plan continues to be the same for years.

Economic Performance
India recorded a moderate growth in GDP to about 6.4 percent. The reason for this is due to contraction in capital formation and public spending did not fulfil the target of 17 percent. Also, the investment share in the growth of GDP fell to about 2 percent in the current financial year compared to the previous financial year growth of about 4 percent. In the upcoming budget, it will concentrate on keeping the capital spending in the range of about 3 to 3.4 percent of the total GDP. It will be considered as the highest in the period of the previous 20 years.

The expansion of capex levels will aid in promoting private sector investments as well investments at state level. It will also encourage growth in the medium term and also maintain growth levels close to 6.5 percent in the upcoming periods.

Growth drivers
Compared to private consumption, investment plays an important role in expansion of growth in the long term. In present times, there are a lot of worries regarding contraction in private consumption due to low consumption levels in urban areas. However, it is projected to grow in the second half of the financial year 2025. There is also a need for tax reduction in personal income but it’s not possible due to slowdown growth of corporate tax, considering moderate manufacturing activity.

In present times, the tax-to-GDP ratio accounts to 11.6 percent compared to the 1.5 percent ratio during the before pandemic period due rise in GST collections. In order to expand GST collection, there is a need to ease the GST rates and also increase the average GST. Apart from this, it needs to bring products such as petroleum under the GST base.

Focus on import duties
Currently, India’s import duties are higher compared to other manufacturing countries like Vietnam and China in Asia. It has increased to about 17 percent in the year 2023 compared to 13.37 percent in the year 2015. The reason for high tariffs was to protect India from China’s dumping strategy and also to promote domestic manufacturing in key sectors such as electronics. However, the high level of tariffs are becoming harmful for India in terms of acting as a replacement for China in trade and also to adopt global supply chains. It also affects domestic production due to high tariffs on inputs. In present times, Trump is planning to impose duties on China. This could be a chance for India to shine but it will be affected due to high tariff levels. It needs to lower tariff levels to make the Indian manufacturing sector strong.

Government borrowings
It helps in covering fiscal deficit as well as affect the resources of the private sector. In the upcoming financial year, the government is anticipated to have expenditure of about 14.5 percent compared to current projection of 14.8 percent. While the spending on segments such as pension, salaries, subsidies, and interest payment will be about 11.3 percent. The capex is anticipated to be about 3.2 percent.

In terms of revenue collections considering both tax and non-tax revenue and deducting states’ shares, it will be about 10 percent. Further, the fiscal deficit is anticipated to account for 4.5 percent in the upcoming year compared to 4.9 percent in the current financial year.

The government aims to have gross borrowing of about 14 trillion and net borrowing of about 11.4 trillion. It is similar to the borrowing in the previous year indicating almost no change in the borrowing levels. It will only help in slight lowering of debt-to-GDP ratio. There is a need for reduction in debts and rapid economic growth.

In order to achieve rapid fiscal consolidation, the government is required to contract the budget base as per the previous pandemic levels but it will adversely affect capex. This is the reason why it needs to maintain the high capex. It can be supported by stable growth in revenue levels and also remaining unused capex funds can be used to maintain the strength of government investment. It will also help to protect from global uncertainties in the economy.