A sagging India story: Budget 2025 aims to revive flagging momentum

Overenthusiasm about India was so 2024

In the past weeks and months, it appears that a great deal of momentum has gone out of the India story. Restoring that momentum will have to be the primary target of this week’s Union Budget. 

Around this time last year, there was confidence that India was out-performing along multiple economic indicators. But that may no longer be the case. Growth, for example, while still high by global standards, will likely slow to the lowest level since the year of the pandemic.

  Even though official growth numbers are no longer as trusted as they once were, other indicators seem to be backing up this deceleration. Growth in electricity output, for example, often seen as one of the most reliable indicators of what is actually happening on the ground, was also at its lowest level since the pandemic in 2024. This was particularly intense in the second half of the year, according to analysis reported in this newspaper. Industrial activity also slowed towards the end of 2024.

Meanwhile, concerns about consumer demand —which some in the corporate sector have been quietly expressing for some years—turned into a loud chorus in the last earnings season. The festival period between October and November, normally an occasion for strong volume and price growth, was something of a disappointment for fast-moving consumer goods (FMCG) companies. This newspaper has reported data from NielsenIQ suggesting that volume growth was only 3 per cent and price growth between 1 and 2 per cent. 

Disturbingly, the FMCG companies attribute this partly to a slowdown in urban areas, particularly in metropolitan cities. It is unsure why cities are particularly vulnerable at this moment; some have argued that the reason is real estate prices, while others point to subdued wage growth, high real rates, or sticky food inflation. Whatever the reason, slower consumer demand is a problem for the growth engine of the economy. The India growth story has always been dependent on strong consumer growth domestically; in its absence, the Indian market will struggle to attract foreign investment, and domestic companies will worry about overcapacity. Nor will it be easy for a transfer and welfare system designed especially to bolster rural demand and agricultural income to address problems in larger cities.

  Two issues other than the growth slowdown have also contributed to concerns about India in recent months. The first is the performance of the stock market, and the second the movement of the rupee. These may be overstated as problems, but are nevertheless worth examining.

  In the markets, the story has two sides. Domestic institutions and mutual funds keep chugging along, while foreign investors have sold more than $19 billion of Indian shares since the final quarter of 2024. India’s have been the worst performers among major markets, in local currency terms, in the month to January 26; emerging market indices as a whole have fallen only 0.2 per cent. If the Nifty 50 ends this month having lost value, that would be its first four-month run of losses since 2001. And even then its forward price to earnings ratio would be considerably higher than its competitors in the Indo-Pacific.

  Given the expectations built into current stock prices, there isn’t a lot of room for further surprises to earnings on the downside. Nor will things necessarily get better in the “America First” era. Bloomberg Intelligence’s estimates of Indian 12-month forward operating margins during the last period when Donald Trump imposed tariffs, from January 2018 onwards, was a decline of 120 basis points. The Chinese decline, in comparison, was 128 basis points while European estimates barely moved.

  Foreign investors will also keep an eye on the rupee. That India’s currency has been losing value against the dollar is not per se a problem — the dollar has strengthened considerably, after all. An overvalued rupee in any case has been problematic for India’s merchandise exports, and it would not hurt for its value to stabilise at a considerably lower level. But there are certainly questions about how and when it will find that value which weigh on investors’ minds.

  A linked question is the path of inflation in India; the rupee’s value feeds into import prices, and thus particularly energy costs locally. Many analysts who had predicted that the Reserve Bank of India would cut rates by 50 basis points early in 2025 have pushed their predictions for such a cut back by several months as a consequence.

  Framing a Union Budget that pushes back against these headwinds might appear to be a daunting task. But it should also be noted that there are multiple structural advantages that the Union finance ministry might be able to take advantage of. Many of these are the fallout of its own careful work in prior years.

  First, India’s tax position has grown more comfortable. Direct tax collection has surged in the past year, and is now ahead of indirect tax collection. The government has also been very cautious about raising non-tax revenue, and it might be time to revisit that approach.

  On the other side of the ledger, revenue expenditure has been put on a tight leash year after year, with the exception of the effects of the pandemic — which were, in any case, visible less in India’s fisc than in many others.

  Most importantly, India has built up a reputation in the past years for clarity and fiscal responsibility. It certainly can’t afford a dent in that status now. Even when constructed under the current stresses, the Budget mathematics should be clear and above board.

  There’s also a lot of low-hanging fruit in terms of policy that could quickly restore optimism. This column had argued at the time of the last Budget in July 2024 that it signalled three welcome policy directions. First, movement towards cleaning up the direct tax system; second, reversing a protectionist trend in tariffs; and third, the promise of an overall policy framework to guide decision-making. Even taking the next concrete step on these three might serve to restore some juice to the India story.   

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi