Preserving Macro Stability Amidst Elevated Volatility To Test Budget  

The authors constitute the research team of QuantEco*, an independent economic research firm.

India’s Union Budget 2025-26 will be presented in the shadow of a heightened and unparalleled phase of geopolitical and geo-economic turbulence not witnessed in the last few decades. This is causing not just a moderation in trend growth for the world economy but also a higher level of divergence in growth performance among countries.  

While the political wars may have begun to show signs of fatigue and dissipation in recent weeks (though yet on an uncertain trajectory), the evolving economic turbulence has intensified with widespread expectations of looming trade wars.  

The global trend towards protectionism that started with the US-China trade war under Trump 1.0 and picked up post-COVID is likely to worsen further with Trump 2.0 pushing forward his promised economic policies on trade, investments, and labour. Notably, the surge in protectionism since 2017 has coincided with a drop in the flow of cumulative global FDI.  

Two Halves  

On the domestic front, the Indian economy post-COVID had managed to emerge relatively unscathed due to an optimal fiscal (sequentially restrained & targeted policies) and monetary (moderately expansionary approach & targeted) policy mix, resulting in a healthy growth-inflation balance.  

India hit a sweet spot in 2023-24 by clocking real GDP growth of 8.2%, accompanied by a declining CPI inflation at 5.4%, while managing to lower the fiscal deficit ratio from a high of 9.2% in 2020-21 to 5.6% in 2023-24. A commendable feat indeed!  

The narrative largely held through the first quarter of 2024-25, with real GDP growth at 6.7% and CPI at 4.9%. India’s economic resilience was being tested from the July-September quarter onwards. A sharp deceleration in GDP growth to 5.4% was an outright consequence of moderation in industrial economic activity, with growth rate plunging from 8.3% in first quarter of 2024-25 to a six-quarter low of 3.6% in the second quarter of 2024-25. The slowdown was largely concentrated across the sub-sectors of mining, manufacturing, and electricity. Excessive rains over August-September 2024 and slow traction in government capex spending weighed on industrial activity in the quarter. This was validated by weaker corporate results in the second quarter of 2024-25.  

On the positive side, headline consumption expenditure held up well in H1 2024-25 at 6.7% relative to its dismal performance through 2022-23 and 2023-24. The consumption story, however, was moving on twin tracks. Recovery in rural consumption was getting more palpable, as reflected in strength in two-wheeler and FMCG sales and low utilisation of MNREGS. The prospects looked even better with overall robust monsoon performance. In contrast, high-frequency indicators representing urban consumption pointed towards moderation, as seen in passenger vehicle sales, credit card outstandings, consumer confidence, and FMCG sales, among others, amidst the RBI’s clampdown on unsecured loans.  

While growth in April-September decelerated to 6.0%, we expect H2 GDP growth to recover to 6.7%, supported by festive season-related buoyancy in October-December, followed by a revival in government capex spending in January-March. We expect GDP growth to clock 6.4% for 2024-25.  

A greater worry emerged through elevated CPI inflation since the third quarter of  2024-25, essentially driven by adverse food price shocks. The easing inflation trajectory through the first two quarters (4.9% and 4.3%, respectively) reversed sharply in the third quarter to 5.6%, led by an 8.52% annualised food inflation. While we see this trajectory easing in the last quarter of 2024-25, to end the year 2024-25 at an average of 4.9%, the annual correction of just 50 basis points in CPI inflation will be less impressive versus a 130 bps correction seen in 2023-24.  

Clearly, India needs to regain its sweet spot. Against this macroeconomic backdrop, we assess what the Union Budget 2025-26 could do to restore and enhance India’s macroeconomic stability.  

Supply-Demand, Both Need Budget Support  

At the outset, the budget may need to enhance not just supply-side growth impulses but, in the current environment (of slowing urban consumption), focus on sustainable demand-elevating measures as well. Thus, supporting growth, curbing underlying inflationary impulses, while strictly adhering to the promised path of fiscal consolidation should serve as the basic tenets of Budget 2025-26.  

It will be pertinent to push forward the newly announced schemes such as the Employment-Linked Incentive (ELI), Pradhan Mantri Awas Yojana (PMAY) Urban 2.0, and expansion of the Production-Linked Incentive (PLI) scheme to labour-intensive sectors.  

With broad-based recovery in private capex likely to get deferred amidst global and domestic demand uncertainties, the central government will need to continue to offer capex support, as states’ absorptive capacity for capex is getting increasingly constrained. Amidst the expected shortfall in capex spending in 2024-25, we expect capex growth in 2025-26 to be comparable to the 2024-25 growth rate of ~10%. While lower than the post-COVID pace of expansion, in absolute terms, it translates into a sizable incremental support, given that the central government’s capex spends have increased more than threefold between 2020-21 and 2024-25.  

In addition, support to the cohort of income taxpayers via a rejig of tax slabs and/or modest tinkering of rates could be offered to aid disposable incomes, especially among urban consumers. In the same spirit, the ELI scheme could see a higher allocation of ₹350-400 billion in a bid to create formal jobs.  

As sectoral themes, manufacturing and agriculture warrant the highest attention. The budget provides an opportune moment for the government to reintroduce and build on land and labour reforms to raise productivity in the economy.  

The central government should keep its fiscal powder dry by avoiding any fiscal missteps while keeping a close watch on the changing global trade and economic order. With a constructive revenue-expenditure mix and the government’s inclination to project conservative revenue estimates, we expect the central government’s fiscal deficit target to be lowered to 4.5% of GDP in 2025-26 from 4.9% in 2024-25. This will take the fiscal deficit close to the 2019-20 level (which had a minor COVID impact) of 4.6% of GDP.  

The impact of Union Budget 2025-26 would be measured on three parameters:  

• Boosting growth impulses, both by demand- and supply-augmenting measures  
• Addressing the underlying drivers of inflation, viz. food—by creating a comprehensive agri-ecosystem for raising output, augmenting infrastructure, and providing research and education to farmers for climate-resistant farming  
• Maintaining fiscal discipline, but not overdoing it

Delivering on all these would pave the way for raising India’s potential growth to around 7%.

*QuantEco offers in-depth insights into India's economy, spanning macro trends and financial markets. Acting as an outsourced in-house economist, the firm provides corporates and investors with business and market intelligence.