The coming days will be crucial for India’s economic outlook as the Union Budget announcement on February 1 and the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting on February 7 are set to determine key policy measures aimed at stimulating growth amid a slowing economy, according to the latest report by Union Bank of India (UBI).
The report underscores that both the government and the RBI are expected to introduce strategic steps to counter economic deceleration. The Indian economy, which expanded at over 8% in the fiscal year 2024, witnessed a slowdown to 5.4% growth in the July-September quarter of the current fiscal, necessitating urgent interventions.
Fiscal Consolidation on the Agenda
As the country grapples with moderating GDP growth, the government is expected to persist with fiscal consolidation efforts. The report predicts that the fiscal deficit target will be reduced to 4.5% of GDP in FY26 from 4.8% in FY25. However, it warns that fiscal consolidation is likely to be driven by a reduction in government expenditure as a percentage of GDP rather than a significant rise in revenue, despite the possibility of another record-high dividend from the RBI exceeding Rs 2 lakh crore in FY26.
“The fiscal impulse is expected to be negative, with consolidation driven by a fall in expenditure rather than a pickup in revenues. The quality of spending has also come under pressure due to delays in capital expenditure post-elections, with public spending reaching absorptive limits in certain sectors, leading to calls for diversification in this Budget,” the report states.
Emphasis on Stimulus Measures
To tackle weak demand and spur private capital expenditure, the report highlights the need for targeted stimulus measures in the upcoming budget. Proposed measures include tax cuts for the middle class, equalization of tax rates on bank deposits with other risk assets, an increase in capital expenditure allocations, and sector-specific support for MSMEs, renewable energy, and tourism.
Monetary Policy and Liquidity Easing
On the monetary front, the report suggests that the RBI is expected to take action to ease liquidity constraints and support economic growth. The MPC is anticipated to initiate a 50 basis point rate cut, signaling the beginning of a shallow rate-cut cycle aimed at boosting demand.
The RBI has already undertaken liquidity-boosting measures in recent months to mitigate the effects of slowing growth, and further actions are expected in the upcoming policy review.
Challenges in Public Spending and Fiscal Management
Despite these anticipated measures, concerns persist regarding the quality of public spending. The report highlights that FY25 has seen delays in capital expenditure and increasing subsidy burdens, particularly in the fuel and fertilizer sectors. As a result, the government’s fiscal impulse is likely to remain negative, with fiscal consolidation being driven more by expenditure cuts than revenue growth.
Given these constraints, the Finance Minister is expected to strike a cautious balance between maintaining fiscal discipline and implementing growth-oriented reforms.
With the Union Budget and RBI policy meeting poised to define India’s economic course, stakeholders across industries will closely watch the government’s and central bank’s next moves in addressing the current economic slowdown.
