India's annual budget announcement for 2025 has taken on heightened significance, marking the first full budget of Prime Minister Narendra Modi's third term. With the world's fifth-largest economy facing slowing growth and weak markets, this budget aims to set the course for the government's economic strategy amid challenging circumstances.
Finance Minister Nirmala Sitharaman's budget has primarily catered to short-term relief measures, effectively focusing on middle-class tax cuts rather than implementing sweeping reforms to bolster the economy's long-term growth potential. Analysts noted the disappointment surrounding the government's lack of commitment to address the structural issues impeding growth.
According to Reuters, India's GDP growth is expected to decline to 6.4% for the financial year ending March 31, 2025, down from 8.2% the previous year. Despite some reductions in taxes intended to benefit urban consumers, there are concerns about systemic issues like low agricultural productivity and bureaucratic hurdles hindering business expansion.
Dhiraj Nim, an economist at ANZ Research, commented on the need for more extensive measures. “Eight percent will require far more significant interventions across agricultural markets, human capital, and the ease of doing business,” he said.
Modi's administration is perceived to be backtracking from its previous reform agendas, focusing instead on appeasing key voter bases and regional politics. Analysts point out this is not the first time Modi's Bharatiya Janata Party (BJP) has sidestepped substantial reforms to cater to immediate electoral needs. Amit Ranjan, research fellow at the Institute of South Asian Studies, indicated, “The government has often responded to electoral politics rather than pushing outright reforms, even when it enjoyed substantial parliamentary power.”
Conversely, the budget introduces regulatory reforms, aiming to reduce red tape and support business growth. Underlined by Sitharaman, the budget emphasizes shifting to trust-based regulatory models, aiming to dismantle the bureaucratic constraints stemming from the so-called License Raj.
Among the notable proposals is the establishment of the high-level committee for regulatory reforms, which is intended to simplify compliance burdens and improve the business environment significantly. Experts stress the need for effective implementation to achieve these ambitious goals.
The budget also addresses the foreign direct investment (FDI) regulations by increasing investment in the insurance sector from 74% to 100%, aiming to expand coverage and attract foreign capital. This move aligns with the broader objective of achieving 'Insurance for All' by 2047, laying the groundwork for enhanced financial inclusion.
Despite these welcoming changes, questions have arisen about the investment framework. With rising FDI and outward foreign investment indicating upward momentum at $42.1 billion and $37.7 billion respectively, the government has emphasized the necessity of bilateral investment treaties to create more favorable conditions for investors.
By integrating reforms aimed at improving the ease of doing business and promoting investment across states, the government seems intent on diversifying economic growth beyond traditional financial hubs like Mumbai and Bengaluru.
Yet, as the BJP gears up for significant electoral battles, including those for the Delhi assembly, the political dimensions of the budget cannot be overlooked. Polls indicate the middle-class vote remains pivotal, and record tax concessions, particularly for income tax, could play well with these voters as the BJP seeks to rebuild support, especially after mixed results from recent elections.
According to polls, the BJP aims to leverage these budgets to solidify its position within the middle class, which has expressed dissatisfaction with previous tax structures. With income tax changes promising reduced burdens for many, there is speculation it will galvanize support for the party during upcoming elections, reflected by the significant relaxations on income tax for the salaried class.
Much of the budget appears influenced by the Rashtriya Swayamsevak Sangh (RSS), which has strong ties with the BJP, as well as the electoral pressures impacting important states like Bihar where projects aimed at local development took precedence.
Comprising financial support for infrastructure projects, such as airports and irrigation, the allocation aims to bolster BJP's standing among local electorates. This investment approach signals the government’s attempt to strike balances between fostering local growth and maintaining broader economic reforms.
Overall, budget 2025 attempts to navigate through complex economic instability by introducing reforms intended to stimulate growth and consumer confidence. Yet, how these measures translate on-the-ground will depend on their implementation and the political will to persistently push reforms amid the pressures of upcoming electoral engagements.
India's economy stands on the brink of either renewed growth or stagnation depending on how effectively this budget translates intentions to actions. The upcoming months will reveal if these initiatives bridge the gap between economic aspiration and tangible progress.