In summary, due to slower increase in capital and investment expenditures, India’s real GDP growth has been revised down to 6.4%.
Reviving domestic demand, expanding private consumption, and raising capital investment by at least 20% should be the main goals of the 2025 budget.
Due to capital expenditure growth falling considerably short of the planned target, Factinfo projects the FY25 fiscal deficit to be 4.8% of GDP, which is slightly less than the budget estimates.
According to Factinfo India, the budget deficit for FY26 will be 4.4% of GDP.
Many were surprised by the National Statistics Office’s (NSO) release of the 2Q FY25 real GDP growth figures, which showed a 5.4% growth rate. It led to a negative revision of India’s GDP growth prediction for FY25 by most multilateral bodies and rating agencies. India’s real GDP growth was revised down by 0.5% points from the IMF’s October 2024 growth prediction to 6.5% for FY25 in its January 2025 version of World Economic Outlook. In December 2024, the RBI revised its estimate of FY25 real GDP growth from its October 2024 estimate of 7.2% to 6.6%. The First Advance Estimates (FAE) of National Accounts by the NSO has assessed India’s real GDP growth at 6.4% for FY25.
The Government of India’s (GoI) capital expenditures unexpectedly shrank by (-12.3%) in the first eight months of FY25, compared to a budgeted growth of 17.1% above the Controller General of Accounts’ (CGA) actuals for FY24. This is one of the main causes of this slowdown. The growth of gross fixed capital formation (GFCF), or investment expenditure, decreased as a result. GFCF growth is predicted to be 6.4% in FY25 versus 9.0% in FY24. Nonetheless, despite ongoing global economic challenges, the expected contribution of net exports to real GDP growth remains positive at 1.7% points, in part due to reduced crude prices.
With the exception of the public administration et al. sector, data on output indicates significant deficits in the Gross Value Added (GVA) in non-agricultural sectors. Manufacturing, mining, and quarrying in particular grew slowly in FY25. Furthermore, the two main service sectors—trade and hotels, financial services and real estate—as well as the construction, energy, gas, and water supply sectors all displayed slower than anticipated growth rates.
Regarding inflation prospects, the Reserve Bank of India (RBI) predicted in its December 2024 monetary policy review that CPI inflation would stay moderate at 4.5% in 4QFY25, down from 5.6% in 3QFY25. In reality, although vegetable inflation decreased to a four-month low of 26.6% in December 2024, CPI inflation decreased to 5.2% from 5.5% in November 2024. In December 2024, core CPI inflation was steady at 3.7% for the third consecutive month. A downward modification of the policy rate in FY26 would be possible if the overall CPI inflation trend continues to decline.
We anticipate that the repo rate may be lowered by 50 basis points throughout the year, perhaps in two installments. Spending on private investment would be somewhat supported by this. According to the NSO’s FAE, inflation based on the implicit price deflator (IPD) is predicted to rise from 1.3% in FY24 to 3.2% in FY25.
According to NSO, nominal GDP is expected to expand by 9.7% in FY25, which is significantly less than the 10.5% growth projected in the budget for July 2024. For FY26, we anticipate that the budget may assume a nominal GDP increase of 10.5%, which would include 6.5% real GDP growth and close to 4% IPD-based inflation.
FY25 revised estimates
The FY25 updated projections for tax collections may fluctuate only slightly from the projected magnitudes relative to GDP, given that the nominal GDP growth in FY25 was 9.7% rather than the 10.5% level that was planned. Factinfo believes that the impact on the Gross Tax Revenue (GTR) of the Government of India will be negligible, despite the lower nominal GDP growth. As a result, we project that GoI’s net-tax revenues and GTR, which represent 11.76% and 7.91% of GDP, respectively, would only be slightly less than BE’s (Table 1). Revenue receipts as a percentage of GDP would not be impacted because this small discrepancy is probably going to be compensated for by slightly greater non-tax revenues.
The fiscal deficit to GDP ratio will, however, somewhat improve from 4.9% to 4.8% of GDP in FY25, mainly due to a noticeable decrease in capital expenditures relative to GDP and a slight rise in revenue expenditures relative to their corresponding budgeted expenditures. The revenue deficit will rise from 1.78% (BE) of GDP to 1.99% as a result of revenue expenditures growing faster than planned.
Expectations from FY26 budget: Balancing fiscal stimulus and consolidation
The signals from recent national income accounts data and India’s medium-term growth expectations must be taken into consideration when creating the union budget for FY26 in light of the changing global landscape. The GoI should concentrate on reviving domestic demand using both fiscal and monetary tools, even though weak export demand can be attributed to global economic challenges.
Fiscally speaking, capital expenditures might be bolstered by a drive for private consumption through personal income tax (PIT) reforms, which might give lower and lower middle-income households more disposable income.
We anticipate that global energy prices, especially those of crude oil, will stay low in FY26. Under the incoming administration, the US will increase its supply of gas and shale oil to the world market. This might ease some of the pressure on India’s CPI inflation and make it easier to lower policy interest rates.
The pressure on the INR relative to the US dollar, which is weakening more quickly than anticipated, is another growing worry. Since the US economy is thought to be doing well under the current administration, financial resources are returning to it.
Additionally, importers from India have a need for US dollars. In order to strengthen protection for domestic industry, especially domestic manufacturing, the budget may look at the import tariff structure. This might encourage domestic manufacturing and lower the demand for imports, and consequently, for the US dollar.
Fiscal consolidation prospects in the medium term
With the announcement of the implementation of the recommendations of the Eighth Pay Commission, which will be in effect from FY27, there is a possibility that the momentum towards achieving fiscal consolidation targets may be delayed. The fiscal deficit and debt targets, as per the GoI’s 2018 amended FRBMA, are 3% and 40% of GDP, respectively. However, achievement of both of these targets is likely to be delayed because of the additional pressure on revenue
