The Union Budget for FY2024-25 is eagerly awaited, as is always the case. This year we have the benefit of the Vote-on-Account that had been presented in February, which gave us a sneak peek into the upcoming full Budget. The added anticipation in FY2025 draws from the new political dynamics post the recently held elections.
While our Parliamentary election cycle has concluded, a number of key States go to the polls shortly. Apart from that, the global political landscape appears exceedingly uncertain, with ramifications for the path that the ongoing geo-political conflicts may take in 2025 and beyond.
Jobs focus
So, what can our Union Budget and the overall policy environment realistically do to buttress India’s enviable macroeconomic position amidst the global uncertainty? One clear ask is to safeguard the domestic drivers of economic growth. Another is to create a supportive environment for the private sector to add jobs in large enough numbers to absorb the impending surge of new entrants into the labour force.
Government capital spending has soared since the pandemic, helping to fuel the GDP expansion. The Interim Budget had built in a 17 per cent rise in the government’s capital spending in FY2025, which we estimate will be maintained in the full budget. ICRA foresees healthy allocations on transportation infrastructure projects, including on roads, railways, ports and airports.
Beyond FY2025 as well, we expect the government to continue to prioritise the available fiscal space towards enhancing capital spending, both directly and through the interest-free loans provided to the State budgets.
Private consumption accounts for around 60 per cent of India’s GDP. With the awaited demographic dividend, domestic consumption growth will remain a key lynchpin of India’s economic momentum going forward. This is doubly so, as ageing societies in our export partners will cast a shadow over what, how much, and to whom we export going forward.
Lacklustre consumption
Discomfortingly, private consumption has recorded a CAGR of just 4 per cent between FY2019 and FY2024. Overall consumption growth was lacklustre in FY2024, despite pockets of high demand in urban areas, which were interspersed with more cautious consumer sentiment in the rest of the urban segment as well as in the rural areas.
Enhanced spending on schemes such as PM Kisan, MGNREGA or PM Awas Yojana may help to bolster sentiment in the rural segment, which is bearing the brunt of another uneven monsoon.
Additionally, a higher threshold for personal income tax would certainly enhance sentiment for salaried individuals. The marginal propensity to spend the reduced tax outgo is likely to be rather high, which would boost activity in the near term.
Spending on education, with a clear view towards skilling and upskilling, as well as on health, to reduce the anxieties faced by households, needs to be boosted over the medium term.
Another critical component towards rapidly improving the participation of women in the labour force is addressing childcare needs.
For the demographic dividend to be adequately realised, policies must focus on creating an enabling environment to generate well-paying formal sector jobs over the medium term.
To this end, and to reduce our net imports, we anticipate a continued focus on the Production Linked Incentive (PLI) schemes, both for high-technology new-age sectors, as well as the more traditional ones that employ labour in greater numbers.
It will be equally important to maintain a supportive environment for the services sector as well, with the Global Capability Centres having emerged in the recent years as a big source of services exports.
The writer is MD and Group CEO, ICRA Ltd