The annual growth of 6.4 per cent in the current fiscal year, as per the National Statistical Office’s first advanced estimates, will be the slowest in four years and below the initial projections of the government. The estimation of lower growth is on the back of a slowdown in all segments of industry and services. The upcoming Union Budget, therefore, is crucial, not just for long-term economic development, but for immediate relief to struggling sectors.
All eyes are on Nirmala Sitharaman, the supposedly indefatigable finance minister of Prime Minister Narendra Modi who has presented seven consecutive budgets, to deliver strategies that will address the challenges and steer the country towards sustainable growth. With just a few days to go, there is a chorus of demand building across India that Budget 2025 should be an exercise to reverse the slowing GDP and rising inflation. Perhaps, dazzled by the images of promises made by Donald Trump to Americans, Indians too want a New Deal. Some optimistic commentators even want the Modi-Sitharaman duo to do a 1991 on the economy. That was the year when Narasimha Rao and Manmohan Singh began the process of unshackling the economy.
How far will Sitharaman go in her new policy prescriptions? So far, her budgets have been bureaucratic in nature, leading to the impression that Sitharaman and, more so, her boss prefer the wisdom of North Block babus to their own political instincts on what is good and bad for the economy. But this time, there are several factors looming over the economic landscape, each more daunting than the other. The unmistakable slowdown, inflationary pressures, widening gap between savings and investment within most households, rising unemployment and global headwinds like tightening US monetary policy and volatile commodity prices form a complex web of challenges that India faces. These issues are disrupting the growth momentum and straining the fiscal stability, while also increasing inequality and reducing consumer confidence. Indeed, the worsening global conditions and domestic confidence has almost wiped out the recent stock market rally.
Looming large in the background is the Trump factor. As Trump assumes office as the 47th President of the US soon, Indian policymakers and business leaders have begun bracing for potential shifts in trade and immigration policies. For instance, Trump has repeatedly warned trade partners, including India and China, of increased tariffs. His threats of reciprocal tariffs have left New Delhi concerned, given that the US is India’s largest export market. This looming uncertainty over a potential trade war has kept many Indian business leaders on edge. Adding to the concerns is Trump’s stance on tightening immigration laws.
Countering the Trump effect
To navigate these challenges, the government needs to adopt a proactive approach, focussing on boosting domestic production, diversifying energy sources, enhancing infrastructure and promoting innovation. To counter the Trump effect, it needs to be disruptive. A mere quick fix may not do this time. The NSO downgrade follows disappointing economic indicators and a slowdown in corporate earnings in the second half of 2024, which have forced investors to rethink the country’s earlier outperformance and cast doubts over the ambitious economic targets set by the Modi government.
Of course, it is a good thing that the fresh worries are heightening calls for authorities to lift sentiment by loosening monetary settings and slowing the pace of fiscal tightening. “You have to revive the animal spirit, and you also have to ensure that consumption picks up,” says Madhavi Arora, chief economist, Emkay Global Financial Services. “It’s not that easy”. She believes that India should expand its fiscal balance sheet or cut interest rates.
Such calls have come amid a flurry of meetings by policy-makers with businesses growing increasingly worried about faltering demand. Sitharaman held a series of meetings in December with industry and economists, customary ahead of the annual budget presentation on 1 February. Some of the measures proposed in those talks to boost growth include putting more money into the hands of consumers and cutting taxes and tariffs, according to demands by trade and industry associations. Such measures have the potential to boost economic growth, ease inflation, and create jobs.
Indeed, as confidence wanes, the political urge to stimulate growth appears to be broadening. For instance, the finance ministry’s monthly economic review, published in December, said the RBI’s tight monetary policy was partly responsible for the hit to demand. Modi himself has made some high-profile changes recently in what is seen as a bid to lift economic growth as a priority over price stability. In a surprise move, he appointed Sanjay Malhotra as the new RBI governor, replacing Shaktikanta Das, a trusted bureaucrat, who was widely expected to get another one-to-two-year term as bank chief after having completed six years at the bank. The appointment of Malhotra, who recently said the central bank will strive to support a higher growth path for the Indian economy, came immediately after the September quarter growth slowed more than expected to 5.4 per cent. There has also been a major reshuffle of top bureaucrats in the finance ministry. Such reshuffles are never heard of on the eve of the budget.
During the pandemic, Modi sought to keep the economy growing by raising infrastructure spending and limiting wasteful expenditure to keep government finances in good shape. During the Covid years and after, infrastructure funding saw significant growth. Between 2019-20 and 2023-24, the government capital expenditure (capex) had logged a 35 per cent CAGR. That lifted headline GDP growth but has not supported wages or helped consumption sustain an annual expansion of more than 7 per cent over the past three years.
However, in the first half of the current fiscal, this crucial funding witnessed a sharp decline, falling 15 per cent on year-on-year (y-o-y), partly attributable to the general elections and various state elections, including Maharashtra.
To begin with, the Union Budget 2024-25 had seen a moderation in infrastructure funding. Overall, the funding slowdown adversely affected the growth momentum, with the GDP growth in the second quarter slowing to 5.4 per cent.
Infrastructure investments are critical to economic growth, as they have multiple direct and indirect impacts. For instance, the automobile sector has a significant build-up of used commercial vehicles. Though these are up for replacement, lesser infrastructure investments have prompted buyers to wait and watch.
During the next fiscal, about 500,000 light commercial vehicles are up for replacement. In comparison, the figure was 340,000 units in 2022-23. In the medium and heavy commercial vehicle space, capacity amounting to 4.7 million tonnes is expected to come for replacement compared with 3.9 million tonnes in 2022-23. The replacement demand has been slow from the last quarter of 2023-24, on account of concerns over slowing infrastructure expenditure and subdued consumption of discretionary items.
Much of the replacement demand can be met in 2025-26 if the government provides requisite boost to infrastructure capex, which will also have a multiplying impact on steel, cement, and overall consumption. A focussed roads programme – and not just a few showpiece expressways – will go a long way in giving the needed fillip for the infrastructure sector.
Rekindling the private sector interest
The budget will also need to revive private sector investment. So far, the government has been doing much of the heavy lifting, it is high time the private sector chipped in with bigger investments. To rekindle the private sector interest and pave the way for its greater participation in the growth revival, a comprehensive relook at model concession agreements is needed. These agreements form the backbone of public-private partnerships (PPPs) and they need to be updated to reflect current market realities and investor expectations.
Also, the government must walk the talk on the formation of a PPP institute to streamline and facilitate such projects. The institute must be set up as soon as possible to provide the necessary support and guidance for private sector involvement in infrastructure development.
Asset monetisation is another critical area where private sector participation can be increased.
The National Monetisation Pipeline (NMP) has identified various asset classes for monetisation, with roads and ports leading from the front. However, there is a need to bring other asset sectors such as power, energy, etc, under its ambit. A definitive roadmap to this effect will be welcome. It will also help in crowding in private sector investments and bring in a new class of investors, especially asset managers.
Similarly, the upcoming budget should continue to prioritise sectors like green energy and transportation to ensure a sustainable and resilient infrastructure framework. A focus on these areas will help the government balance economic growth and sustainability. It will not only boost the economy but also create a robust and resilient infrastructure network for the future.
Arora feels the country is in a ‘bit of a limbo’, where individuals are not spending. She expects this to continue if employment does not improve and wage growth remains weak.
That is where the reported moves to cut income tax for some individuals assumes relevance.
Income tax relief and raising of exemption limit will boost disposable income, which would encourage higher consumption and stimulate economic activity. Such a measure could provide immediate relief to the middle class, particularly as inflation and living costs continue to rise.
Another measure that could reduce financial burden on the public is a cut in fuel prices. Despite global crude prices dropping, fuel prices have not decreased due to high excise duties. Industry experts believe that lowering these duties could alleviate inflationary pressures, increase disposable income, and improve consumption, particularly in lower-income households.
Addressing unemployment
To address unemployment, there’s a push to focus on employment-heavy industries such as garments, footwear, tourism, and MSMEs. By stimulating growth in these sectors, the government could generate jobs, boost domestic production, and position India as a stronger player in global markets.
With rural areas showing signs of recovery, boosting rural consumption remains a priority. Proposals include increasing daily wages under employment schemes, enhancing direct benefit transfers and offering consumption vouchers for low-income families to increase purchasing power and demand in rural markets.
China’s practice of dumping excess goods in the global market has hurt Indian industries. Industry bodies are calling for protective measures to safeguard domestic businesses from unfair competition, ensuring that local industries can thrive without external distortions.
Economists say the government will have to slow some of its fiscal tightening to support growth, with the success of such measures dependent on the extent of the cuts. Though trade does not come strictly within its purview, the budget can certainly chip in to promote exports, say, of some of the value-added products, with competitive rupee export credit rates.
The focus can shift from labour-intensive goods to value-added items, aiding job creation. It can also boost initiatives like dedicated e-commerce hubs across the nation, including easier policies for return of goods. The hubs are part of the government’s plan to achieve the goal of $1 trillion in merchandise exports by 2030 and was announced in the previous budget.
Also, with regard to trade, analysts say India needs a credible plan to fight Trump’s tariff wars. If China remains the main target of Trump’s tariffs, it could present an opportunity for India to boost its trade profile, although it would also need to let the rupee fall further to make its exports more competitive.
India needs to “seriously implement tariff rationalisation to help embed itself more deeply into global value chains,” says Sanjay Kathuria, former lead economist, World Bank, and also an adjunct professor at Georgetown University. This could include tariff cuts aimed at pre-emptively heading off punitive levies from a Trump White House.
“India should announce some proactive measures for the US suo moto, to bring concessions for the US rather than waiting for the new administration to announce their steps,” says Sachin Chaturvedi, head, Research & Information System for Developing Countries, New Delhi.
If the Trump administration fails to take the bait, the government should up its game in the European Union and the Gulf Co-operation Council zone, by crafting well-thought-out FTAs which will solidify the partnership, unlocking new opportunities for mutual economic growth.
Only such bold interventions in key areas could help India overcome its current economic challenges and pave the way for a more prosperous future. While the economy may still outperform globally, the question is whether it can maintain 7.5-8.5 per cent growth or slow to 5-6 per cent – and be satisfied with it.
Box 1
The Trump factor
As Donald Trump assumes office as the 47th President of the US, Indian policy-makers and business leaders are beginning to brace for potential shifts in trade and immigration policies. These changes, expected to bring both challenges and opportunities, could significantly impact the next phase of US-India relations. Many economists, political experts and cor-porate leaders anticipate Trump’s second term to be marked by initial chaos and uncertainty.
S. Jaishankar, minister, external affairs, said in November that Prime Minister Modi was among the first three calls that Trump took after his spectacular victory. “I know today a lot of countries are nervous about the US, let’s be honest about it. We are not one of them,” he added. Brave words! But, such undue optimism apart, Jaishankar has a busy time ahead getting to know the key functionaries of the incoming administration and its priorities as he now heads to Washington.
The Modi government has set up an inter-ministerial group of top bureaucrats to keen a watch on the evolving policy matrix of the Trump administration and how its different strands impact the Indian economy, particularly trade.
Kumar Mangalam Birla, chairman, Aditya Birla group, which has invested nearly $15 billion in the US, including a $4 billion greenfield expansion underway, is among those who have underscored the importance of Trump’s ascension. “The one thing that could disproportionately influence the course of the year is the Trump Factor. This holds the potential to reshape geopolitical dynamics, with profound implications for the global economy and business,” he said.
“Disruption will be the new normal,” adds Biswajit Dhar, distinguished professor, Council for Social Development. “Trump will be disruptive. He has no intention of following the rules of the game. He will try to violate WTO rules even more, pull out of the Paris climate accord and even the WHO. This could set off a domino effect, with other countries following suit. India will be targeted. There are already indications, but how far he goes remains to be seen”.
It will be instructive to know how certain sectors have moved, positively or negatively, after the Trump victory in November – and whether the movements have been in tandem with the expectations.
Pharma
The Nifty Pharma index has declined by 2.13 per cent since November. Market experts had anticipated that the Indian pharmaceutical sector, especially generic drug manufacturers, could face challenges. This was based on the expectation that he might focus on cutting the US healthcare budget and introducing global tariffs, which could hurt Indian exports.
Information Technology
The Nifty IT index has gained 3.81 per cent since November. The market expected a negative impact on the sector, with increased US corporate spending due to tax cuts, but also stricter offshore outsourcing policies. During his previous term, Trump prioritised American jobs and encouraged IT companies to hire locally for on-site roles, which could increase costs and impact the profit margins of Indian IT firms.
Metals
The Nifty Metal index has dropped by 9.28 per cent since November, which contradicts market expectations. Trump’s return was expected to be beneficial for the Indian metal sector due to his anti-China stance, which could have created more opportunities for Indian metal producers. China, being a major exporter, has been accused of dumping metals at low prices. Analysts had predicted that Trump might impose a 60 per cent tariff on Chinese goods, potentially boosting demand for Indian metals. However, the market has reacted differently so far.
Energy
Since November, the Nifty Energy index has declined by 10 per cent. Some parts of the Indian energy sector remain under pressure, as Trump has expressed an anti-ESG (environmental, social and governance) stance. In his victory speech, he mentioned plans to halt renewable energy projects on ‘day one’ of his presidency. Many Indian companies export solar modules to the US and new protectionist policies could create additional challenges, especially since India imports a significant number of solar cells from China.
Rupee
It was widely expected that Trump’s pro-growth policies, such as corporate tax reductions and tariffs, would strengthen the US economy, leading to a stronger dollar as investors move their funds to US assets. As a result, the rupee has depreciated by 2.93 per cent against the dollar since November.
Crude oil
Crude oil prices have risen by 6.6 per cent since November. Trump’s policies favour increased oil production, which may have contributed to the rise in prices.
Trade
Trump has repeatedly warned trade partners, including India and China, of increased tariffs. His threats of reciprocal tariffs have left New Delhi concerned, given the US is India’s largest export market. This looming uncertainty over a potential trade war has kept many Indian business leaders on edge.
Adding to the concerns is Trump’s stance on tightening immigration laws. According to a Pew Research report, Indians constitute the third-largest group of illegal immigrants in the US, making this another potential area of friction for India.
Globally, discomfort with Trump’s presidency is evident, even among long-standing US allies. UK Prime Minister Keir Starmer, Germany’s Chancellor Olaf Scholz and France’s President Emmanuel Macron were notably absent from Trump’s swearing-in ceremony. At the World Economic Forum in Davos, Trump emerged as one of the most-discussed topics, second only to climate change.
Positive in long term?
However, some in India believe Trump’s anti-China stance could work in the country’s favour over the long term. Sachchidanand Shukla, group chief economist, Larsen & Toubro, is of the opinion that traditional sectors like manufacturing could benefit.
“Given that he has promised to raise tariffs against China far higher than before, it could help India’s manufacturing and PLI-linked sectors,” Shukla feels. “If India doubles down on reforms, particularly in ease of doing business, labour processes, and other areas, it could become a significant beneficiary of Trump 2.0”.
India’s tech sector might also gain as the US ramps up its focus on innovation in AI, quantum computing, and other transformative technologies. “India’s globally recognised STEM talent pool is ready to play a pivotal role in driving progress and creating value for both nations,” says a senior official from the Hyderabad Software Enterprises Association.
IT sector analyst Pareekh Jain, founder, Pareekh Consulting & EIIR Trend, points out that Trump’s presidency could be favourable for corporate America, which would indirectly benefit Indian IT firms. However, he flags two key risks: the H-1B visa issue and tariff policies. “H-1B visa dependency has reduced compared to the past, so the risk is smaller. But Trump’s tariff policies could impact the Indian IT industry, depending on their shape and form,” Jain explains.
As Trump’s second term begins, policy-makers and business leaders would do well to be prepared for what could be a tumultuous yet potentially transformative era in its relationship with the US.
Box 2
Post-budget rally likely
It would be an understatement to say that market sentiment has been adversely affected ahead of the Budget, which will be presented on 1 February. A multitude of factors have weighed heavily on investor confidence, leading to a decline of nearly 10,000 points in the Sensex. Since 25 September 2024, the Sensex has been drifting downwards. The formation of lower tops and lower bottoms indicates that markets remain spooked by uncertainty, further clouding sentiment.
A slowdown in GDP growth, fears surrounding the impact of President Trump’s policies on India Inc, and apprehension about the Budget are among the key concerns. Adding to this has been the relentless selling by foreign portfolio investors (FPIs). Since the beginning of January, FPIs have collectively sold more than Rs50,000 crore, and if the selling spree continues, the figure could rise by another Rs20,000 crore or so. The outflow of FPI funds has also led to a sharp depreciation of the rupee, which now stands at over Rs86 to the dollar. The immediate outlook appears far from optimistic.
Will the Budget serve as a turning point? “The Budget will likely see a continuation of earlier policies. The infrastructure push will continue, with emphasis on job creation,” says Pavan Bharaddia, co-founder of Equitree Capital, a SEBI-registered PMS company with an AUM of Rs600 crore. “Consumption remains wobbly, so some relief in income tax can be expected,” he predicts, adding, “Ultimately, what will matter is the performance of quarterly results for December, some of which have already started coming in.”
Opinions, however, differ. “I think the government is concerned about market sentiment. I expect it to be a market-friendly Budget,” says A Balasubramanian, Managing Director of Aditya Birla Sun Life Mutual Fund. He adds: “The gains tax on long-term capital gains, which was increased in the last Budget, could well be reduced. There might also be measures to incentivise long-term holdings, such as eliminating capital gains tax for shares held for 3 years or more.” Balasubramanian is optimistic about a post-Budget rally, noting that a reduction in LTCG tax would improve sentiment and signal that the government is listening to the markets. However, he cautions that it remains uncertain whether the post-Budget rally will be sustained.
The big trigger for markets, he suggests, would be if Trump – who has been making the right noises – can broker an end to the Russia-Ukraine war. This would be a significant positive for global markets, and India would benefit from a further decline in oil prices.
There is, however, concern that investors, both domestic and foreign, may use any post-Budget rally to sell on every rise. It is hoped that they will wait to see if the rally is sustainable. As stated, President Trump may also attempt to bring the Russia-Ukraine conflict to a resolution. Yet, it remains uncertain whether he might use the threat of higher tariffs as a negotiating tool with China. In either case, India may not be significantly worse off, as a revival of economic activity in China could lift metal prices substantially.
Many believe the government will do everything in its power to improve sentiments. While it is expected to continue spending on infrastructure and increasing capex budgets across various departments, it must also address the haemorrhaging of FPI funds. Given the highly volatile geopolitical situation, the government may aim to ensure some semblance of stability in the stock market.
Corporate results for the third quarter have been mixed, and many large investors are shifting from mid-cap and small-cap stocks to large-caps, which are perceived to have better resilience to market volatility. As Business India stated in its earlier issue, Outlook 2025, this year investors will need to be selective in their buying.
In the event of hostilities ceasing, gold prices may stabilise and decline, potentially proving many analysts wrong.