The Union Finance Minister Nirmala Sitharaman tabled the Budget presentation at Parliament on Tuesday. Some of the core focus areas of the budget were employment, skills development, MSMEs and the middle class. Changes in income tax slabs were announced while capital gains tax — both short term and long term have been increased.
While there is mixed reactions from every other industry, top economists believe that the FY25 budget struck a fine balance by continuing to consolidate finances while also tackling social sector demands, with a focus on saving over spending.
Here’s what top economists said:
Abheek Barua, Chief Economist, HDFC Bank
The central focus of this budget has been on employment and associated issues like skill formation. The government’s efforts to reap India’s demographic dividend is visible in its push towards labour intensive production, its skilling initiative, incentivising formal job creation and increasing participation of women in the workforce.
The change in income tax slabs along with the direct benefit transfer to first time workers, is likely to spur consumption, particularly for small ticket items, by increasing disposable incomes. The budget’s policy mix – including continued capex, job creation, support for manufacturing, agriculture, and rural development – is likely to be positive for India’s potential growth.
The government made no compromise on its capex plans despite the increased allocation to some of its allies. The commitment towards fiscal consolidation with a reduction in the fiscal deficit to 4.9% of GDP in FY25 is a positive for medium-term debt sustainability.
Although markets have been disappointed with the increase in the capital gains tax, this is line with the communication by different branches of the government and regulators to be cautious and prevent any excess build-up of risk in the system.
Radhika Rao, Executive Director and Senior Economist, DBS Bank
Faced by a trade-off between fiscal consolidation and expectations for measures to boost demand, the FY25 Budget struck a fine balance by continuing to consolidate finances while also tackling social sector demands, with a focus on saving over spending. Nominal GDP forecast was maintained with conservative tax buoyancy assumptions, leaving the room for additional revenue cushion.
The budget also focuses on structural improvements, including efforts to boost job creation and skills development. Overall, Budget measures were focused on incremental steps towards taking the economy towards the Viksit Bharat 2047 goalpost of reaching a ‘Developed India’ status.
Additionally, fiscal consolidation and macroeconomic prudence were prioritised, tightening the FY25 fiscal deficit by a cumulative 70bp to -4.9% of GDP (vs interim -5.1%) compared to -5.6% of GDP in FY24, aiming to consolidate finances without imparting a negative impulse to growth and demand. This aims to consolidate finances while avoiding a negative impact on growth and demand. The revenue from the RBI’s surplus transfer and robust direct tax collections was allocated between reducing the fiscal deficit and increasing revenue expenditure.
Looking ahead, the government has signaled a continued reduction in both deficit and debt levels, aiming for around -4.5% of GDP by FY26. This adjustment in the fiscal stance is expected to lead to better expenditure quality and reduced borrowing costs due to lower yields.
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank
The current Budget has extended the broad themes from the interim Budget focusing on infrastructure, fiscal consolidation, jobs, MSME, rural and agricultural support. While some near term disappointment on lack of dated borrowing cuts have weighed in bond market sentiments currently, we expect the bond markets to maintain their euphoria in the months ahead as demand supply dynamics remains very comfortable.
Achala Jethmalani, Economist, RBL Bank
From a macroeconomic standpoint, the increased revenue receipts led fiscal consolidation augments well for the economy at large. The social sector spending and the focus on extending loans under several schemes implies increased financial intermediation. The land related reforms proposed in the budget if gets implemented would help facilitating credit flow and other agricultural services to the end-user.
By imposing higher taxes on capital market related transactions could possibly act as a deterrent for short-term related activities and possibly lead to either consumption, or bring about a ‘nudge’ to move to traditional savings or shift to long term investment goals.
With borrowing program lowered marginally and walking the fiscal consolidation glide path is encouraging from debt markets standpoint as it raises the prospects of softer bond yields. The healthy macro mix, the fiscal positioning and outlook raises prospects of an upgrade in India’s sovereign rating too; further auguring well for the debt market. The fiscal prudence will also help in appropriate monetary response with inflation seen easing. Thus, overall the budget to us appears to be a positive for the banking and financial sector.
Tanvee Gupta Jain, UBS Chief India Economist
Today’s budget was the first key policy announcement by the Modi 3.0 government post recent elections. As expected, the central government remained on the fiscal consolidation roadmap and estimated to bring down the fiscal deficit (% of GDP) to 4.9% in FY25 (better than 5.1% estimated as per interim budget and 5.6% last year). However, a surprise for the equity market came on the tax front, especially the increase in short-term and long-term capital gains tax (see below). While retaining their capex growth targets (17.1%YoY, as already indicated in the budget), the government announced an increase in social welfare spending largely directed towards youth, women, MSME and agriculture (more on narrative rather than actual spend).
Considering the Indian economy has been in a sweet spot lately, we believe pursuing counter-cyclical fiscal policy should help strengthen India’s macroeconomic stability and create a foundation for strong medium-term growth. We expect a sovereign rating upgrade for India (currently rated at the lowest investment grade) by at least one of the three rating agencies over the next 18-24 months.
Indranil Pan, Chief Economist, YES BANK
The Budget takes a leaf out of the strategic direction to sustainable growth that has been penned by the Economic Survey. Thus, even with one eye on the fiscal consolidation, the government announced structural measures to boost employment – not only in terms of numbers but also quality, addressed the need to scale up MSMEs through credit facilitation to the sector – even for MSMEs that do not strictly have a formal accounting system. To aid small business, the mudra loan limits have also been enhanced. We believe that this is a budget for the longer term while near term consumption boost comes through providing benefits to income taxpayers.
The Budget also promises structural reforms in the factors of production and use market forces to boost the growth story. Equity market participants may not have been happy with the Budget as the STT, LTCG tax rates go up. However, this was government’s way of casting its tax net wider. We see a reduction in the market borrowing programme by Rs 120 bn while net T-bill issuance is lowered by Rs 1 tn over the interim Budget. The reduction in the net T-bill issuance may aid domestic liquidity and push down short-term rates while long tenor rates may remain sticky.
