• 01 Feb 2025 04:36 PM
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Budget 2025 | Seven key factors to track in the budget speech

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Finance minister Nirmala Sitharaman will on Saturday deliver her eighth Union budget in a row as the National Democratic Alliance government that returned to office last year with reduced majority in Lok Sabha seeks to add vigor to economic growth and create more jobs. It is easy for a government to usher in reforms early into its term as there may not be any immediate political risks. Mint takes a look at key factors to watch out for in the Union budget for 2025-26.

Finance minister Nirmala Sitharaman will on Saturday deliver her eighth Union budget in a row as the National Democratic Alliance government that returned to office last year with reduced majority in Lok Sabha seeks to add vigor to economic growth and create more jobs. It is easy for a government to usher in reforms early into its term as there may not be any immediate political risks. Mint takes a look at key factors to watch out for in the Union budget for 2025-26.

Economic growth projection and fiscal deficit

The Union Budget makes an estimate of gross domestic product (GDP) for the financial year in nominal terms, on the basis of which key fiscal indicators such as fiscal deficit are expressed. 

Bank of Baroda on Friday said India's nominal GDP could grow at 9.8-10.3% in FY26. That is, India's economy is likely to reach the size of 355-357 trillion next fiscal year. Going by that, a 4.5% fiscal deficit—the gap between the government's revenue and spending met through borrowing—for next financial year could translate to 16 trillion. 

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Sticking to the fiscal glide path would indicate the government's fiscal prudence and leave room for private sector borrowings. The government is well on its way to reducing India's fiscal deficit to 4.9% of GDP in the current financial year, down from 5.6% in FY24, said Suman Chowdhury, executive director and chief economist at Acuité Ratings & Research Ltd. The government has also committed to a roadmap outlined in FY22 to reduce its fiscal deficit to below 4.5% of GDP by FY26.

Market borrowing 

The government's financial statement will indicate how much it is likely to borrow from the market and how much it could raise from sources like the National Small Savings Fund (NSSF) to finance fiscal deficit. Government borrowings are a keenly watched budget figure as this could influence financial markets. 

Tax policy

The Finance Bill outlines the policy and tax rate changes relating to personal and corporate income as well as changes in the customs duty structure. Given the expectations about relief on personal income tax, Budget 2025 will be keenly watched by many. Businesses and experts have said relief on personal income tax could help in enhancing demand for goods and services. It remains to be seen if the government will re-introduce a 15% concessional tax rate for new factories, a benefit that expired in March 2024. 

Measures for widening the tax base, curbing tax evasion, and reducing disputes are often announced in the budget. Extensive use of technology and measures meant to check revenue leakage have so far benefited the government. An announcement about the new Income Tax Bill is also likely in the budget speech. GST-related legislative changes approved by the GST Council will be part of the Finance Bill.

Atmanirbhar Bharat

Experts expect customs duty changes in the Budget that complement other policy measures taken to boost domestic manufacturing. The government has been calibrating customs tariffs to promote local manufacturing, while also offering production incentives in select industrial sectors. 

Also Read: Budget 2025 Economic Survey Highlights: FDI revives to $55.6 billion in FY25; Take a look at India's Economic Outlook

The effort is to promote backward integration by businesses, which requires replacing imports of intermediates and semi-finished goods with locally produced ones. Globally, several economies are calibrating their trade policies to attract investments and to boost their manufacturing sector.

Reforms and de-regulation

In view of Prime Minister Narendra Modi's pledge of making India a developed nation by 2047 and the emphasis on reforms given in the Economic Survey 2024-25 that was tabled in Parliament on Friday, it is likely that the Union Budget speech will also lay emphasis on reforms and deregulation. This could enable the economy to realise some of its untapped potential. 

Capital expenditure

The Central government has been focusing on increasing capital expenditure that could boost asset creation and improve demand for goods and services. The government is expected to keep its capital expenditure at around 3.4% of nominal GDP in 2025-26 to sustain economic growth. 

The government had earmarked 11.11 trillion of capital expenditure for FY25, up from 10 trillion allocated for the year before. After raising capital expenditure by 11% annually in the budget for 2024-25, the government may adopt a slightly restrained approach in the FY26 budget, with growth in capex expected to settle at around an annual increase of 7-10%. 

At around 3.4% of GDP, the government's capex support may hover at around 12 trillion in FY26. Increased capex would largely go towards supporting investment in building highways and expressways and modernisation of railways. Both the sectors may see increased allocations. 

Samir Kanabar, tax partner at EY India, said India would require $2.2 trillion in infrastructure investment to achieve the target of becoming a $7 trillion economy by 2030. Infrastructure spending also tends to have a multiplier effect as every rupee spent leads to a three times impact on GDP, Kanabar said. 

Inclusive development 

The Budget is also expected to announce enhanced fund allocation for schemes meant to support women, farmers, youth and the poor.