FM's balancing act: Consumption boost and fiscal prudence

Budget 2025 attempted to address economic slowdown without deviating from the fiscal path

Published: Feb 1, 2025 04:39:00 PM IST

Updated: Feb 1, 2025 04:51:44 PM IST

The government’s focus on fiscal health has been evident in its unwavering commitment to lower the fiscal gap after it widened to 9.1 percent in FY21 on account of the unprecedented coronavirus pandemic which brought the global economy to a standstill. Image: Altaf Hussain/ Reuters

Finance Minister Nirmala Sitharaman played to the gallery. She announced a slew of measures to boost consumption to accelerate inclusive growth. And she did this without deviating from the fiscal roadmap. The government is on track to achieve a fiscal deficit of 4.8 percent in FY25 versus the earlier estimate of 4.9 percent. This is expected to further reduce to 4.4 percent for FY26.

“In the July Budget, I had committed to staying the course of fiscal consolidation to keep that fiscal deficit each year such that the central government debt keeps on a declining path each year, as a percentage of GDP,” Sitharaman said in her Budget speech on February 1.

The gross market borrowings are estimated at Rs15.82 lakh crore for FY26 against the revised estimate of Rs14 lakh crore in FY25.

As per Budget documents, the revised estimates for central government receipts for FY25 are pegged at Rs31.47 lakh crore, which includes net tax receipts of Rs25.57 lakh crore, and government expenditure is seen at Rs46.17 lakh crore, which includes capital expenditure of Rs10.18 lakh crore.

Earlier, in July, total government receipts and expenditures for FY25 were estimated at Rs32.07 lakh crore and Rs48.21 lakh crore each. "The Budget delivers on the expectations of the Triveni Sangam of reduction in fiscal deficit, support to urban consumption through tax cuts, and an increase in capex through allocations to the Centre, states and PSUs," says Nilesh Shah, MD, Kotak Mahindra AMC.

Sonal Varma, chief economist, Nomura, believes the Budget has tried to balance the twin objectives of fiscal discipline and supporting growth. “At the margin, there is a tilt towards supporting consumption through tax cuts for middle class households, relative to the public capex push seen over the last four years,” she says.

Also read: Budget 2025: Focus on growth and fiscal consolidation

The government has bettered its deficit reduction targets over the past two years. In FY24, the deficit was lowered from a revised estimate of 5.8 percent to 6.6 percent. Likewise, it declined from its earlier estimate of 5.1 percent to 4.9 percent and is now seen at 4.8 percent for FY25 and 4.4 percent versus 4.5 percent for FY26.

For the past three Budgets, the government has tried to engine growth with a multiplier effect by boosting capital spending on building infrastructure. In a marked shift, Budget 2025 aims to bring some relief to the middle class to revive consumption and push growth.

“This shift takes into account the difficulty in executing public capex projects due to budget and institutional capacity constraints, and the need to support private consumption this year, given weakness in urban consumption,” Varma adds. “Nevertheless, public capex is expected to rise by around 10 percent year-over-year in FY26, which is a modest but realistic outcome.”

Rahul Singh, CIO-equities, Tata Asset Management, agrees that the Union Budget proposals have prioritised consumption with personal tax cuts without straying from the fiscal consolidation path. “The focus on investment cycle continues but mainly through measures pertaining to ease of doing business and creating a conducive environment for private investments rather than budget allocations,” he adds.

But the tax bonanza suggests a likely shortfall in the government coffers to the tune of Rs1 lakh crore. What’s the fiscal math?

Varma explains that the government has been able to show a lower fiscal deficit number and give an income tax boost due to another bonanza expected from RBI dividends and a slower pace of public capex growth. “The growth impulse from the Budget should be marginally positive for FY26,” she says. “Fiscal prudence will keep India’s fiscal risk premia low and provide greater leeway to the RBI to begin lowering its policy rate at the February MPC.”