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Home is where the FM’s heart is

The government’s focus on supply-side measures has not sufficiently addressed the demand side.
Union Finance Minister Nirmala Sitharaman anong with MoS for Finance Pankaj Chaudhary and her Budget team leaving from Finance Ministry for President House before presenting the Interim Budget 2025 in Parliament, in New Delhi on Saturday. TRIBUNE PHOTO: MANAS RANJAN BHUI
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A classical weave and a traditional weft were in evidence not only in the sari that the Finance Minister (FM) wore, but also in the macroeconomics of the Union Budget she presented on Saturday. The first full Budget of Modi 3.0 — Nirmala Sitharaman’s eighth consecutive one, only two short of Morarji Desai’s record of 10 — goes back to the basics: boost demand to spur growth in output and employment. The public expenditure policy is simple — keep the fisc steady.

After having followed an investment-led growth strategy after the Covid-19 pandemic, the FM has changed course to follow a consumption-led path for growth. Without pausing the autonomous public investment cycle, the Budget seeks to stimulate consumption demand by increasing the net disposable income. This, in turn, is expected to trigger derived investment demand and catalyse private corporate investments.

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The government’s focus on supply-side measures — emphasising private investment (which makes up about 30 per cent of the GDP) through initiatives like the 2019 corporate tax break — has not sufficiently addressed the demand side of the economy. The private sector itself has pointed to a low demand and underutilised capacity as key constraints, suggesting that even well-intended supply-side reforms may falter if consumer confidence remains weak.

As such, the focus now, clearly and decisively, is the home market. Policy tweaks have been done to address the growing evidence of under-consumption in the economy; they revolve around the Rs 1 lakh core demand injection into the system. Private final consumption — a critical driver of economic growth — constitutes over 60 per cent of India’s GDP; it has seen a sluggish growth in consumer spending, at around 4 per cent in FY 2023-24. The decision to raise the tax-free income threshold to Rs 12 lakh aims to boost domestic consumption by increasing the disposable income of the middle class. This move is anticipated to stimulate demand across various sectors, including consumer goods, automobiles and real estate, as individuals will have more spending power.

The FM has, rather boldly, chosen to go for growth in the “growth-inflation” trade-off amid evidence that inflation has put real incomes, both urban and rural, under pressure — more so in the face of an uncertain and inclement global environment. In the months to come, the key challenge will be to accelerate growth while managing inflationary risks.

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With the rupee having depreciated by 3 per cent in the first nine months of the current fiscal, the trade deficit is coming under upward pressure. Increased import costs not only widen the deficit but also contribute to domestic inflation, a factor that the Budget’s fiscal consolidation efforts are keen to address. Moreover, heightened volatility in the rupee increases hedging costs and introduces uncertainty into international transactions, complicating the outlook for export growth.

The action will now shift to mint street for the Reserve Bank of India (RBI) to align the monetary policy with the fiscal policy underlying the Union Budget. While an accommodative monetary policy is the obvious stance, the RBI need not rush into a rate cut until the fiscal stimulus “works its way through the system”. When the stimulus of Rs 1-1.5 lakh crore, including state investments, increased consumption from tax relief and enhanced infrastructure, begins to generate momentum in economic activity, monetary easing will be appropriate.

Till then, the RBI may like to recalibrate its levers of liquidity control in such a way as to increase the velocity of circulation of money without enhancing the quantum. Perhaps, it can undertake targeted repo operations that can stimulate borrowing for productive investments. These measures would help ensure that while borrowing costs remain steady, the overall dynamism of the economy improves, thereby supporting employment and growth.

It could also do well to consider putting some risk capital into the system rather than just keeping the Finance Ministry happy with fat dividend cheques. From

Rs 1,500 crore in the early 1990s, the RBI dividend in now estimated to be Rs 2.11 lakh crore. The same can be deployed in the economy as risk capital, which the RBI is empowered and mandated to do under the RBI Act, 1934.

Overall, the policy challenge is to strike a balance: while structural reforms and corporate incentives are necessary, boosting consumer demand through policies such as direct benefit transfers, increased social safety nets and measures to enhance income growth remains equally critical. Thus, the issue is not simply one of choosing between supply or demand-led strategies but rather of integrating both to create a resilient, inclusive economic model.

The FM seems to be in a collaborative mood with the states, but that intent got buried under her benevolence to Bihar! More than the financial outlay of Rs 1.5 lakh crore for 50-year interest-free loans to states for capital expenditure and reform incentives, the three-year pipeline of infrastructure projects to be implemented in the PPP mode with states holds big potential. So, too, does leveraging the India Infrastructure Project Development Fund for the development of 50 tourist destinations along with states.

The proposed framework to promote global capability centres can go a long way to improve the regulatory governance at the state level. It will streamline non-financial sector regulations, certifications, licences and permissions. These reforms are designed to enhance the ease of doing business and foster industry collaboration, yet their success depends heavily on each state’s capacity to implement complementary measures.

While the content of the Budget is broadly right in terms of direction and also in detail, it is the global context that raises concerns. Globally, uncertainties remain high due to ongoing trade tensions and potential shifts in the US policy. President Trump’s tariff threats — as part of his “America First” agenda — are pressuring countries to reconsider their duty structures. While the Budget has signalled further tariff adjustments aimed at reducing import dependence and enhancing export competitiveness, outlining the possible responses to such an evolving situation would have helped allay apprehensions of markets.

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