Nirmala Sitharaman has managed to achieve something quite remarkable. She has boosted economic growth while keeping a tight grip on government spending. In her recent budget, she reaffirmed a commitment to reduce the fiscal deficit, aiming to bring it below 4.5% of GDP next year. She also promised that by 2026-27, the government debt as a percentage of GDP will be on a downward trajectory.
For the fiscal year 2025, the updated fiscal deficit is projected to be lower than earlier estimates, at 4.8% compared to a previous 4.9%. The government is pushing to maintain its promise of a 4.4% deficit for the upcoming year. Yet, while there is progress, not everything looks perfect. The portion of the government’s excess spending aimed at consumption remains high, which raises questions about fiscal health.
Despite this, Sitharaman is determined to cut down on wasteful spending. In her budget for 2026, she plans to reduce the revenue deficit to 34% of the total fiscal deficit. This is a positive step, as the government debt is also expected to decrease—from 57.1% of GDP in 2024-25 to 56.1% in 2025-26.
But is this approach flawless? There is a catch—these projections heavily rely on the anticipated GDP growth for 2026. Since July 2024, many factors have changed that could affect this outlook. For one, the dynamics of coalition politics are more apparent now. Special projects have been announced for states like Bihar, where elections are approaching. Moreover, significant tax concessions that aim to appease government employees in Delhi were made, showing the influence of political strategy.
On one hand, these measures can stimulate demand and potentially boost growth. Yet, they also risk stoking inflation, which can negatively impact economic expansion. There’s also concern about the long-term effects of reduced government spending in 2025.
Looking outward, the situation is even more uncertain. With Donald Trump back in the White House, fluctuations in trade policies and currency strength could pose challenges. Predictions for global growth are now more cautious, with a reduction in expected growth rates by the IMF for 2025 and 2026.
India’s economy is notably tied to global trade, with exports constituting about 22% of GDP in 2023. If the US takes a more protective stance, it could hurt Indian exports, especially with recent threats from Trump regarding tariffs on BRICS nations, which include India.
Ultimately, much depends on whether the government can accurately forecast economic growth. While past estimates pointed towards healthy nominal GDP growth, the accuracy of the budget relies on meeting these expectations. If growth falls short, the entire budget plan could be at risk.
In summary, while there are hopeful signs in the budget for the coming years, the path ahead is fraught with uncertainties. It’s a delicate balancing act that rests on fragile assumptions.
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Source linkNirmala Sitharaman,India budget 2025-26,fiscal deficit,economic growth projections,GDP growth,inflation pressures,World Economic Outlook,coalition politics,Indian exports,Fiscal policy
