Currently, the major economies across the globe are facing lot of headwinds that can be seen in their GDP numbers. Despite all these uncertainties, India’s economy has managed to grow at a rate of over 7%, making it one of the fastest growing economy around the globe.
As per the IMF, India is likely to become the third-largest economy in 2027 (in USD at market exchange rate) and it also estimated that India’s contribution to global growth will rise by 200 basis points in the coming 5 years. Moreover, various international agencies such as the World Bank, the IMF, OECD and ADB have projected India to grow between 6.4%, 6.3%, 6.1% and 6.7%, respectively in 2024-25.
Journey to become world’s third largest economy will require further constructive reforms. This year’s budget pushes the economy further in that direction. Historically, we have seen that especially before election, governments offers populist measures in expectation of sentimental sway. However, in this Union Budget, the government has defied all such populist expectation and largely focuses on long term structural growth story.
We know that it is an interim budget, but according to me this interim budget is more important than the otherwise regular budget. Primary reason is that during these tough times, one comes to know the seriousness of policy maker, and to everyone’s surprise and in contrary to general opinion, the government has demonstrated its focus on long term structural reform rather than populist measure.
Interim budget focused on two major factors which I think could be the game changer for our economy and it will accelerate the growth path further.
- The Fiscal prudence which came as a surprise for everyone will eventually lead to sharp fall in government yield.
- The increase in the government capex, has led to massive tripling of the capital expenditure outlay in the past 4 years resulting in huge multiplier impact on economic growth and employment creation.
Let me take a deeper dive in both these aspect to highlight the impacts of both the above points.
Fiscal Surprise – The Budget numbers are undoubtedly encouraging. It trimmed the fiscal deficit to 5.8% of GDP, which is a meaningful reduction from the previously budgeted 5.9%. This aims at a more ambitious 5.1% for the next financial year. Post this announcement we have seen sharp fall in 10 year G-Sec yield. The fiscal expansion financed through debt and the resultant debt accumulation have had negative impacts on the economy both in the short as well as in the long run.
Fiscal Prudence has multiple inherent advantages. Firstly, the long term interest rate are defined by fiscal policy and not monetary policy. Secondly FII prefer the economies that are on the path to fiscal prudence as it provides relative interest rate and currency stability. Lastly, it reduces the crowding out effect – low fiscal deficit will reduce the government borrowing and more funds will be available for private sector.
Capex – Real story lies in the Budget’s persistent commitment to public investment, particularly in infrastructure — a sector often perceived as the backbone of sustainable growth. In a surprising deviation from the expected election-year tactics of ramping up rural consumption, the Budget amplified public investment outlay by nearly 11% to ₹11.1 trillion. This is not just a number; it’s a bold statement of intent.
Capital expenditures boost the economy’s capacity for production. In other words, such investments support future growth in the output of the economy. Another factor supporting the necessity of government capital expenditures is the generation of jobs for households. For instance, infrastructure projects opens the job opportunities for families together, particularly for construction workers. This in turn brings in the network effect as the consumption demand begins to grow.
Hence, the Government’s capital expenditure increases the economy’s demand for products and services, and is essential for boosting private sector economic activity.
Effect of Interim budget –
Government Capex – Rise
Job Creation – Increase
Interest Rate – Will Fall
Government Borrowing – Reduce
Currency – Will provide stability
Private Capex – Will be encouraged
In a nutshell, this interim budget is a testimony to a fact that new India is more focused on long term structural growth rather than short term revenue benefits.