FM must raise the bar for growth

The 2025-26 Budget proposals are being formulated in the backdrop of a grim domestic and international scenario. On the domestic front, slowing demand has led to tepid financial results for corporates. The stock markets are volatile, with bears being rampant for the first time in several years. Both Sensex and Nifty have fallen by about 12 per cent since September, largely due to an outflow by foreign institutional investors (FIIs).

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Growth seems to be sluggish, with the first advance estimates of national accounts projecting 6.4 per cent for FY 2025 as against a healthy 8.2 per cent in FY 2024. The geopolitical outlook also remains dismal amid an uneasy truce in the Israel-Hamas war, while the conflict in Ukraine shows little signs of ending soon. Moreover, US President Donald Trump looks set to upend American policies in a wide swathe of areas, especially trade, and this could affect India.

However, there is a ray of hope. The slowdown in the first half of the current fiscal is now being made up for with reports of rising rural consumption owing to higher agricultural output and the impact of direct benefit schemes. Urban demand continues to be laggard, but it is here that budgetary policies could make a significant impact. Providing income tax relief at the lower end of the spectrum could bring more money in the hands of the urban middle class. It is this segment that has provided buoyancy in direct tax revenues in recent years. A calibrated reduction in the lower tax slabs could give a much-needed fillip to urban consumption.

The urgent need to bring about greater simplification and rationalisation of direct taxes cannot be overemphasised. Much has been done in recent years on this score, but an even greater paring of tax rules and regulations is required. Shifting income tax filing to the online route was a major leap in this direction; government websites need to be upgraded to world-class levels as well, given the enormous information technology expertise available in this country.

The Goods and Services Tax (GST) must also be rescued from the maze of Byzantine regulations that are now even being commented upon by the global media. Popcorn tax slabs, symptomatic of the tax bureaucracy’s overzealousness, hit the headlines. It may not strictly come under the purview of the Budget, but a signal of intent on ironing out complexities would be welcome.

The focus of Finance Minister Nirmala Sitharaman must be, however, on stimulating economic growth in view of the slowdown in FY2025. The slump in the second quarter was largely due to sluggish public spending during the General Election. The effort should be to make up for this in FY2026 by ensuring that capital expenditure remains on track so that the engine of growth is revved up yet again. It may ultimately be followed by a much-awaited cut in interest rates by the Reserve Bank of India, thereby providing an even greater momentum to the economy.

There are two key sectors that can also contribute to a revival in the coming financial year and need greater support. These are micro, small and medium enterprises (MSMEs) and export-linked industries. The MSME sector, one of the most vibrant segments of the economy, faced serious challenges during the Covid-19 pandemic. Credit assistance provided at the time did not ameliorate conditions adequately for these enterprises, which also had to face crippling payment delays from both public and private sectors. A package of measures to provide easier credit and repayment facilities would revitalise a sector that generates an enormous number of jobs.

The export-oriented sector poses greater challenges in the light of the Trump administration’s plans to raise tariffs. The extent of tariff hikes on imports are not known yet, but an increase seems inevitable. While tariffs may go up higher for countries like China, there is no certainty that Indian goods will benefit in terms of getting a comparative advantage. Export units need to be given assistance to be able to compete with economies, again like China, where heavy state subsidies are the norm.

It is also a good time to gradually bring down tariff walls built in recent years to protect the domestic industry in view of the ‘Make in India’ programme. This is not merely to blunt the attack from the US over high tariffs, but also to align these levies with international levels. Such a move could go a long way towards plugging this country into global supply chains.

In contrast, Trump’s new policy directive on oil is likely to have a positive outcome for this country. His exhortation to the American oil industry to drill more could result in higher output and lower prices. World crude rates have already fallen from $80 to $78 per barrel since he made these comments. Any price softening will come as a relief by reducing the huge oil import bill and thereby the current account deficit as well.

The proposals should also provide a conducive climate for higher investment, both from domestic and foreign sources. A critical element needing greater attention is the ease of doing business. Even the recent annual corporate summit at Davos became an occasion for several economists to highlight the urgency of improvement in this area. Undoubtedly, much has been done in recent years to cut red tape, but much more work is needed to make it easier to invest and run a business.

As for the volatility in equity markets, the budgetary proposals may not curb short-term trends of FIIs pulling out and moving to places giving higher returns, like the US. But a stimulus to growth will underscore the fact that the India story is there for the long term. It would also ensure that the more viable foreign direct investment flows pick up significantly. The Finance Minister’s aim must be to push growth to the range of 7-8 per cent. Only then will it be possible to come closer to the target of becoming a developed economy by 2047.