The Union budget for 2025 is commendable for two reasons. The first is for its acknowledgement of sluggish consumer demand that is slowing down macroeconomic growth. The second is the realisation that the international trade order is going to change in the near future. The response to the first problem has led to the announcement of income tax cuts of a significant amount. The second anticipation has led to the rationalisation of customs duties, making them simpler and cheaper for Indian producers to import their required inputs. The tax cut would, hopefully, stimulate demand from a shrinking middle class, leading to greater output and employment. The customs duties changes will allow imports that would support a growing economy and boost domestic manufacturing. That too would lead to more output and employment.
With large international markets likely to be hit by the emerging tariff war, smaller markets like that of India would receive greater attention from international suppliers. This is going to be an opportunity for India to strengthen its own supply chains as well as get a toehold in new supply chains that are likely to emerge after the disruption of the existing ones. Public investments are supposed to give way to private investment.
New infrastructure has been put in place during the last 10 years. The promised regulatory reforms will enhance the ease of doing business. It is also expected that the Monetary Policy Committee of the Reserve Bank of India will cut interest rates in the next few days. If banks do pass these reductions onto borrowers, then private investment might get a much-needed stimulus.
The Union finance minister, Nirmala Sitharaman, has managed the budgetary numbers rather well. Despite the large doses of cuts in income tax and customs duty, she has kept the budget estimate for the fiscal deficit at 4.4% of the gross domestic product. In all the aggregate items of revenue and expenditure, Ms Sitharaman has been able to show growth, even if it may be considered modest. There must have been expenditure cuts in the granular details but the aggregate numbers look comfortable. The finance minister has assumed quite a high rate of economic growth for the forthcoming year. Despite cuts in rates, all her tax revenues are estimated to be higher than the revised estimates of last year. This may not turn out to be true given the complex external headwinds. The second factor that will decide whether economic growth responds to the extent Ms Sitharaman might have wished for is how private investors look at the changes in the international trade order and the disruptions in the global supply chains. Investment outlook may take some more time to turn bullish, especially for long-term investments. The finance minister has done the right thing in setting the correct business incentives. Her measures will certainly boost private consumption to some extent. It would then give her some breathing space to review the deeper problems of the economy that are more of a structural nature.