Budget 2025 Expectations : Economics

Dr. Rumki Majumdar, Economist

Current environment

Upside risks:

• Growth: India’s growth unexpectedly slowed to 5.4 percent in the second quarter, primarily due to low capital formation and a weak export performance driven by geopolitical uncertainties and disrupted supply chains. However, consumer spending, specifically rural consumption, held up well. Among sectors, poor industry sector performance weighed on the robust services and agriculture sectors’ growth.

• Robust infrastructure spending: The government has consistently increased the budgetary allocation for infrastructure to reduce logistics costs and increase supply chain efficiencies. Capital expenditures grew by 28.4 percent in FY24 (RE) and are expected to grow 17 percent in FY25 (BE) . However, during H1 FY25, the centre's capital expenditure is merely 37.3 percent of full-year budget estimates, vis a vis 49 percent of the budget estimate last year within the first six months.

• Strong credit growth: The consistent improvement in bank’s balance sheets over the past couple of years and the fall in (non-performing assets) NPAs across sectors have increased banks’ willingness to lend. This has helped a quick recovery in credit growth post-pandemic. Credit growth remains healthy despite the recent influence of higher policy rates and the RBI's vigilance. Credit to the MSME sector saw strong growth in Q2 2025, with micro and small enterprises increasing by 13.4 percent and medium enterprises by 20.5 percent. This suggests that the MSME sector is increasing its investment to expand.

• Strong resurgence in the services sector: The services sector performed well, with a robust 7.6 percent growth in FY24. The sector is expected to continue its growth of 7.1 percent in H1 FY25 as well, while services exports are projected to grow by an impressive 21.3 percent year-over-year. This positive development is encouraging, given the sector’s significant contribution to India's GDP and employment. Between April and October 2024, total services exports reached US$216 billion, compared with US$192 billion during the same period in the previous year, primarily driven by growth in IT and business services. Strong growth of over 9.2 percent in H1 FY25 in finance, insurance, real estate and business services plays an important role in determining urban middle-income class spending.

Downside risks

• Inflation: India’s retail inflation has been volatile due to higher food prices. Barring two months, inflation has been above RBI’s target inflation rate of 4 percent this year and in October 2024, CPI breached RBI’s upper tolerance (of 6 percent), recording a growth of 6.21 percent. High food prices, especially the skyrocketing vegetable prices with double-digit inflation (and at 42.18 percent in October 2024), are concerning as they affect inflation expectations. The persistent rise in food prices is probably affecting even the core prices, which are edging up gradually. Despite the RBI keeping policy rates constant at 6.5 percent since February 2023, inflation has continued to be a problem with temporary reliefs intermittently. A possible rise in inflation in the West could also result in higher import prices, pushing price pressures further up.

• Geopolitical uncertainties: The geopolitical concerns weigh on global investors and policymakers. As the Israel and Iran war intensified in October, there was a brief impact on oil prices and a contagion impact on the global supply chains and economy. Emerging markets witnessed capital outflows after the stimulus announcements in China on 25 September, including India. Net FII investments declined sharply to levels last seen at the onset of COVID-19. The US election results will also imply changes in trade and investment relations with the West and impact on global supply chains. Volatile oil prices and the possibility of higher trade tariffs will likely have an adverse effect on India’s export growth and the current account balance.

Expectations

The first quarter data points to a notable increase in private consumption and a modest improvement in investment activity. We expect these two to be the fundamental growth pillars as global uncertainties weigh on net exports. With the conclusion of the Indian elections, we anticipate that government spending will pick up, supporting growth in the coming quarters of FY 2025.

Top three asks

Expectation #1
The previous budget emphasized employment generation and skill development, with initiatives such as Employment-Linked Incentives and internship programmes. According to the Periodic Labour Survey, the quarterly results for June 2024 show an increase in the Labour Force Participation Rate (LFPR) for both men and women, rising to 74.7 percent and 25.2 percent, respectively, from 73.5 percent and 23.2 percent in June 2023. Additionally, the unemployment rate has been steadily declining.
We anticipate the government will continue to prioritise and enhance efforts towards skill development and employment generation, maintaining the positive momentum. This would help harness the demographic dividend, drive economic growth from both supply and demand sides and boost consumption through higher incomes.

Expectation #2
Inflation remains a crucial challenge for the economy for an extended period, making it a critical consideration for the upcoming budget. The Economic Survey 2024 recommended that India’s inflation targeting framework exclude food prices, as food inflation is primarily supply-driven rather than demand-driven. It suggested that the government should address food inflation through supply-side measures rather than relying on the RBI to manage it with demand-side tools.
We anticipate a focus on long-term solutions aimed at strengthening the agricultural value chain, incentivising production and addressing structural supply-side issues that add to the delivery cost. In the short term, we expect the government to go with Direct Benefit Transfer (DBTs) and food coupons to support rural consumption, as rural inflation is higher and affects rural demand.

Expectation #3
Following the US elections, the risk of volatility in global trade has increased, with potential measures such as higher import tariffs and tax cuts to promote manufacturing in the US. All these will affect global supply chains, thereby affecting Indian exports. As India targets ambitious economic growth, the country must strengthen its position in global markets, especially to reach an export target of US$2 trillion by 2030.
To achieve this, we expect the government to implement a range of measures to enhance the competitiveness of Indian products on the global stage. These may include tariff rationalisation, duty exemptions and remission schemes, which would help lower the cost of Indian exports. Additionally, the government is likely to focus on simplifying export compliance procedures to reduce barriers and enhance exporters' efficiency.

Expectation #4
In recent years, the government has placed a central emphasis on infrastructure development, with capital spending increasing from 1.63 percent of GDP in FY2019 to 3.4 percent in FY2025. As India strives to achieve the vision of a Viksit Bharat by 2047, we expect the government to maintain its strong commitment to infrastructure investment, recognising it as a key driver of broader economic growth.
As the government continues to enhance total factor productivity, infrastructure, as one of the fundamental pillars of productivity, will remain a high priority. We anticipate sustained growth in social, physical and digital infrastructure spending will be prioritised. The government is expected to expand road networks, develop multi-modal logistics parks and improve overall logistical infrastructure to support efficient economic activity. At the same time, the government will also focus on health and education, with a special focus on skilling. Recent success in driving path-breaking digital innovations will likely continue as the government focuses on frontier technologies to address social issues such as inclusion, formalisation of the economy and transparent governance.

Policy recommendations

Recommendation #1
To boost job creation and skilling, we expect the government to
• Target incentives to boost labour-intensive manufacturing sectors or sectors that can push the rural economy, such as textiles, footwear and food processing
• Allocate resources to enabling technology innovations that enhance the quality of blue-collar jobs while helping to formalise the economy
• Extend financial support to employers and employees to facilitate skill development. This could also entail encouraging collaboration between industries and educational institutions to design job-ready curricula and provide apprenticeships
• Develop a comprehensive database to address skill gap challenges and align the skills the market requires with available talent. Course certification, especially for blue-collar jobs, will be helpful.

Recommendation #2
Controlling inflation will be a priority. Long-term initiatives, such as value chain development projects, could be introduced to address the sudden surge in food prices and reduce post-harvest losses. These measures would focus on improving the supply side of the food market. The government could initiate policies that
• Develop a network of cold storage facilities and warehouses at the district and village levels to minimise post-harvest losses and ensure a steady food supply throughout the year
• Promote digital marketplaces that expand platforms such as eNAM (National Agricultural Market) to provide farmers direct access to buyers, reducing dependency on intermediaries
• Ensure that food distribution programmes such as PDS (Public Distribution System) work efficiently to cushion the poorest sections from food inflation
• Introduce direct marketing that encourages private players to procure directly from farmers under-regulated frameworks
• Facilitate collaborations with private companies or even bring in Public-Private Partnerships (PPPs) to modernise supply chain infrastructure and improve procurement efficiency
• Promote technology innovations and solutions (such as blockchain and AI) to digitise supply chains, track inventory and predict weather-based adversaries, thereby reducing wastage and improving forecasting

Recommendation #3
Exporters will need support in times of global uncertainty.
• The further extension of schemes such as Interest Equalisation and the Remission of Duties and Taxes on Exported Products (RoDTEP) would play a crucial role in reducing costs and enhancing the price competitiveness of Indian exports. The Interest Equalisation Scheme provides exporters with subsidies on pre- and post-shipment credit, helping to reduce financing costs and make Indian products more competitive in global markets. Meanwhile, the RoDTEP scheme refunds duties and taxes incurred during the production process but not refunded under other schemes, thus lowering the overall cost of exported goods. Extending these schemes would strengthen the competitiveness of Indian exports.
• The government can incentivise the exporting of high-value manufactured goods such as electronics, precision machinery and medical devices, which is already seeing a rise in the share in exports. Their share increased from 17.6 percent in FY 2014 to 29.5 percent in FY 2024.
• Access to credit, expanding credit guarantee schemes and providing concessional export financing to exporting MSMEs, which often face liquidity challenges.
• Upskill workforce in the export sector will be critical. Training workers in export-critical industries such as textiles, electronics and pharmaceuticals will help India meet global quality standards.

Recommendation # 4
The focus should be on building physical, digital and social infrastructure.
• India should also shift focus to emerging markets and diversify its export markets to reduce dependence on the West. This can be done by promoting digital trade and e-commerce platforms. Providing incentives to start-ups will be helpful.
• Allocate resources towards affordable healthcare and expand coverage of health insurance.
• Increase budget allocation for training and hiring healthcare and education professionals, especially in rural and remote regions.
• Incentivise private-sector participation in medical education to address the shortage of doctors and paramedics.
• Enhance funding for R&D and vaccine research and programmes tackling diseases such as cancer and diabetes.