New Delhi, January 30: The upcoming union budget should increase the capital expenditure (Capex) by at least 20 per cent to revive domestic demand, private consumption and ensure sustainable GDP growth says the EY Economy Watch January 2025 report.
It says the government is expected to continue on its fiscal deficit reduction path, bringing it down to 4.4 per cent of GDP in FY26. A strategic focus on investment and spending reforms will help balance fiscal prudence with economic expansion.
DK Srivastava, Chief Policy Advisor at EY India, said, "As we navigate a challenging economic landscape, the upcoming budget must balance fiscal prudence with growth-oriented measures. Increasing capital expenditure and putting more disposable income in the hands of consumers, particularly urban consumers, will be pivotal to uplifting growth in domestic demand."
Despite global economic uncertainties and currency depreciation pressures, Srivastava noted, "With the right fiscal policy initiatives and reforms, India can continue progressing toward its long-term targets. With an average annual nominal GDP growth of 10.5 per cent, and even assuming a relatively higher annual depreciation rate of the INR/USD at close to 3.5 per cent, India would still achieve the USD 5 trillion economy milestone by FY30."
The EY report outlines four key areas that should be prioritized in Budget 2025-26 to stimulate economic growth. First, infrastructure investment should be increased by at least 20 per cent to drive economic activity and long-term development.
Second, reforms in personal income tax should be introduced to boost private consumption, particularly for lower middle-income groups, increasing their disposable income.
Third, rationalizing import tariffs is essential to strengthen domestic manufacturing and reduce import dependency. Finally, maintaining a stable inflationary environment will create room for interest rate cuts, encouraging private investment.
On the fiscal front, EY India estimates the fiscal deficit for FY25 at 4.8 per cent of GDP, slightly lower than budget expectations due to reduced capital expenditure.
The report says retail inflation (CPI) showed signs of moderation in December 2024, standing at 5.2 per cent, with core inflation steady at 3.7 per cent. These trends suggest a possible reduction in policy rates by 50 basis points in FY26, which could further support private investment.
The report also evaluates fiscal transfers to states, following strategies recommended by the 14th and 15th Finance Commissions. As the 16th Finance Commission deliberates on new recommendations, EY suggests that fiscal transfers should aim for equitable distribution of resources across states.
They should also be subjected to hard budget constraints to ensure responsible spending. Additionally, incentives should be provided to states prioritizing education, health, and revenue generation, while conditional and specific-purpose grants should be reintroduced to address state-specific needs.
