New Delhi [India]: The next 10 days will be crucial for India’s economic trajectory, as the Union Budget 2024 announcement on February 1 and the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting on February 7 will set the course for economic policies amid a slowing growth rate, according to a report by the Union Bank of India (UBI).
Challenges of Slowing Growth
The Indian economy, which expanded over 8% in FY24, recorded a moderated growth rate of 5.4% in the July-September quarter, highlighting concerns of an economic slowdown. The report suggests that both government policies and RBI measures will be vital in addressing the slowdown.
As the country navigates moderating GDP growth, the government is expected to focus on fiscal consolidation, targeting a fiscal deficit reduction from 4.8% in FY25 to 4.5% in FY26.
“The fiscal impulse is expected to be negative, with consolidation driven by a fall in expenditure as a percentage of GDP rather than an increase in revenue. This is despite a likely repeat of a record-high RBI dividend above ₹2 lakh crore in FY26,” the report noted.
Key Budget Expectations
The upcoming Union Budget is expected to emphasize stimulus measures to counter weak demand and encourage private capital expenditure (capex). Key areas of focus may include:
- Middle-class tax cuts to boost consumption
- Tax rate equalization on bank deposits to align with other financial assets
- Increased capex allocation for infrastructure development
- Sector-specific incentives for MSMEs, renewable energy, and tourism
RBI’s Monetary Policy: Rate Cuts Expected
On the monetary front, the report anticipates that RBI will ease liquidity constraints and stimulate demand through a 50 basis point rate cut, signaling the start of a shallow rate-cut cycle.
The RBI has already implemented liquidity-boosting measures in recent months to counter slowing economic growth, and further steps may be taken in the upcoming MPC meeting.
Concerns Over Public Spending and Fiscal Management
Despite expected policy support, the report warns of rising concerns over public spending quality in FY25. Delays in capital expenditure (capex) allocation and growing subsidy burdens, particularly in the fuel and fertilizer sectors, may impact the government’s fiscal stance.
As a result, the fiscal impulse for FY25 is expected to be negative, driven more by expenditure reduction than revenue growth. However, Finance Minister Nirmala Sitharaman is likely to maintain a balanced approach, ensuring that fiscal targets are met while introducing growth-oriented reforms.
With key policy decisions imminent, India’s economic outlook for FY25 and beyond will largely depend on how the government and RBI navigate these challenges.