Context:
The Union Budget and RBI’s monetary policy are two of the most significant events in India’s economic calendar which usually come at the end of February. These shape the fiscal and monetary profile of the country reflecting the strategies of the government and the RBI for pushing growth taming inflation and maintaining fiscal responsibility.
Union Budget FY26
On February 1, 2025 it will set the fiscal tone for the next year and is likely to focus on fiscal consolidation and growth stimulation.
- Monetary Policy Committee (MPC) Meeting
- The last MPC meeting of FY25 by RBI will be on February 7, 2025 and is likely to influence interest rates and monetary policies to control inflation and stimulate growth.
Fiscal Deficit and Economic Growth
- Fiscal Deficit Target FY25
- Fiscal deficit is anticipated to be 4.8% of GDP marginally lower than the targeted 4.9%.
- Economic Growth
- India’s GDP growth has decelerated and the Q2 FY25 growth declined to 54 from 81 in Q2 FY24. Deceleration in all major sectors other than agriculture and services reflects the economic slowdown
Obstacles to Economic Growth
- Weaker Consumer Demand
- Consumption growth is slowing down and forex reserves have declined from 7,049 billion in September 2024 to 62,398 billion in January 2025.
- FDI and Portfolio Investment
- FDI inflows have declined falling from 42 billion in FY23 to 265 billion in FY24. Foreign portfolio investors are also withdrawing capital from the Indian markets which shows a decline in foreign confidence in the market.
- Rupee Depreciation
- Rupee continues to depreciate against the dollar and is putting immense pressure on the economy.
The Requirement of Reforms and Growth Revitalization
- Personal Income Tax
- There has been some murmur that even personal income taxes may be trimmed to help grow disposable incomes as well as push demand.
- Corporate Tax Cuts
- Previous reductions in corporate tax rates have not led to any significant surge in investments since corporations mainly used the saved amount for paying off debts. It is very hard to develop a system that supports actual investment and capacity building.
- GST Reforms
- The GST system needs to be streamlined further especially not to make rules on minor products such as popcorn a bottle neck for overall efficiency in the economy.
Privatisation and Disinvestment Opportunities
- Disinvestment of PSUs
- The government could not seize the privatization of stateowned public sector undertakings PSUsand thereby misses the opportunity to source capital.
- Privatisation
- Privatisation of IDBI Bank and the stakes of the government in PSU banks are still pending. However this is with promising performances of PSU companies like Indian Overseas Bank.
- Divestment Strategy
- The governments divestment strategy could generate revenue but its lack of action in privatizing profitable public companies has raised concerns. Privatization of PSUs could help fund important capital expenditure initiatives to spur growth.
Conclusion
The Union Budget FY26 and RBIs monetary policy are critical in navigating India through its current economic slowdown. The government needs to focus on stimulating growth particularly through reforms and an accelerated capex push In parallel a more aggressive approach to privatisation and divestment could free up capital for reinvestment in critical sectors. Without these measures the fiscal deficit and sluggish growth might continue to pose significant challenges.
