Union Budget, RBI policy to shape India’s economic course

Key announcements on fiscal strategy and monetary easing expected to drive growth recovery

January 30, 2025

The next 10 days are critical for India’s economy, with the Union Budget on February 1 and the RBI's Monetary Policy Committee meeting on February 7 set to provide key growth directions

Amid slowing growth, the government is expected to maintain its fiscal consolidation strategy, with a projected deficit target reduction to 4.5% of GDP by FY26

The UBI report emphasises the need for stimulus measures, including tax relief for the middle class, capex boosts, and sector-specific initiatives for MSMEs, tourism, and renewable energy

The RBI is anticipated to ease liquidity constraints and stimulate demand through a likely 50 basis point rate cut, marking the beginning of a shallow rate-cut cycle

India’s economic trajectory is set to be defined in the coming days with the Union Budget scheduled for February 1 and the Reserve Bank of India’s (RBI) Monetary Policy Committee meeting on February 7. The Union Bank of India (UBI) report outlines the importance of these announcements as the nation grapples with moderating GDP growth following an 8% expansion in FY24, which slowed to 5.4% in the July-September quarter of the current fiscal.

The government is expected to prioritise fiscal consolidation, aiming to reduce the fiscal deficit to 4.5% of GDP by FY26 from 4.8% in FY25. The report highlights that this consolidation will likely be driven by expenditure reduction rather than revenue gains, despite the potential for another record-high RBI dividend of over Rs 2 lakh crore in FY26.

Public spending has faced constraints due to delays in capital expenditure following state elections and the limited absorption capacity in some sectors. As a result, the upcoming budget is likely to emphasise diversifying public spending while addressing weak demand through targeted stimulus measures. The report points to possible tax cuts for the middle class, equalised tax rates on bank deposits and risk assets, and sector-specific initiatives for MSMEs, renewables, and tourism.

On the monetary front, the RBI is expected to act to ease liquidity pressures and support economic growth. The report anticipates a 50 basis point rate cut, signalling the beginning of a gradual easing cycle. Recent liquidity injections by the central bank highlight its ongoing efforts to counter slowing growth.

Despite these anticipated steps, challenges remain, including the pressure on public spending caused by rising subsidy burdens in the fuel and fertiliser sectors. The fiscal impulse for FY25 is projected to remain negative, driven by expenditure cuts rather than revenue growth.

Nevertheless, the Finance Minister is likely to adopt a cautious but balanced approach, adhering to fiscal targets while introducing measures to revive private investment and sustain economic recovery. Over the next 10 days, the road map will be pivotal in shaping India’s economic path.

Source: Economic Times

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