Vipin Malik, Chairman & Mentor, Infomerics Ratings.
Both the Union Budget FY26 and the RBI Monetary policy have announced policy measures conducive towards a demand led recovery. The India’s Union Budget for FY26, presented on February 1, 2025, is fashioned under the theme "Sabka Vikas," highlighting inclusive growth across all sectors of the economy. A distinguishing feature of this budget is a special thrust on India’s middle-income class, where it is categorically mentioned that enhancing spending power of India’s rising middle class is a crucial objective among others of this budget.
India is expected to grow at 6.4% this year (FY25), and likely by 6.3-6.8% by next year (FY26). The GDP for FY 2025-26 is estimated at ₹ 356,97,923 crore, which is 10.1% over the Revised Estimates for FY 2024-25 of ₹ 324,11,406 crore released by NSO. India’s real and nominal GDP are expected to grow at 6.4% and 9.7% respectively in FY25 as per 1st Advanced Estimates (AEs), whereas nominal GDP is projected to grow by 10.1% in FY26.
Earlier, India's GDP growth slowed to 5.4% in the July-Sept’24 quarter, a seven-quarter low dragged down by low manufacturing growth. In this context it may be highlighted that the FY26 Union Budget has announced of setting up a “National Manufacturing Mission” (NMM) covering small, medium, and large industries for furthering “Make in India” by providing policy support, execution roadmaps, governance and monitoring framework for central ministries and states. The government aims to reduce the fiscal deficit to 4.4% of GDP in FY 26, whereas for FY25, the Revised Estimate (RE) remains at 4.8%. The fiscal consolidation path and maintaining range-bound public debt are crucial for India’s sovereign rating aspect.
The thrust in the budget remains more on rejuvenating the aggregate demand by focusing more on middle-class rather than exclusive focus on capex. The declaration of setting up the “Special Window for Affordable and Mid Income Housing (SWAMIH) Fund 2” is also a policy towards this direction.
The budget has continued its focus for MSME, where the credit guarantee provision for MSME is enhanced. There is announcement of setting up of an “Export Promotion Mission”, with sectoral and ministerial targets, driven jointly by the Ministries of Commerce, MSME, and Finance, which will facilitate easy access to export credit, cross-border factoring support, and support to MSMEs to tackle non-tariff measures in overseas markets.
The FY26 budget has tried focusing more on incentivising the middle-class by providing reduced slabs with an aim to boost household consumption and investments. However, to what extent this would be effective is yet to be seen since many middle-income households are struggling in repaying loans and possible many are caught up in the so-called ‘debt trap.’ There could have been some rebalancing towards the bottom pyramid, though.
In line with the pulse of the budget, the RBI Monetary Policy Committee (MPC) has also resorted towards an easing path by reducing the policy repo rate by 25 bps from 6.50% to 6.25% in the Feb’25 monetary policy. Further, the MPC decided to maintain the stance to ‘neutral’ in line with their focused approach towards a durable alignment of inflation with the target, while supporting growth.
The MPC noted that inflation has shown softening trends, which is expected to moderate further due to a favourable outlook on food inflationary trends. The MPC also noted that growth remains much weaker compared to last year, which opens policy space for the MPC to support growth, while remaining focused on aligning inflation with the target. Therefore, the MPC decided to reduce the policy repo rate by 25 basis points to 6.25 per cent.
Both budget and monetary policy have adopted a softening /easing path and to incentivise the middle-income class to incentivise aggregate demand acknowledging the policy uncertainty in a volatile world.
Disclaimer: Views expressed above are the author’s own and do not reflect the publication’s views.