India’s 2025-26 budget focuses on economic growth, inclusivity, and reforms

Finance Minister Nirmala Sitharaman outlines measures to drive economic growth, enhance productivity, and aid vulnerable groups in India's 2025-26 budget.

India's finance minister Nirmala Sitharaman (center) and other members of the finance ministry leave the ministry to present the budget at Parliament in New Delhi, India, on Saturday, February 1, 2025. Photo by Prakash Singh/Bloomberg/Getty Images

By Clarisa Sendy and Alana Salsabila

India's Finance Minister Nirmala Sitharaman unveiled the government's 2025-26 budget on Saturday, outlining plans to boost middle-class spending, stimulate private investment, and promote inclusive development. The world's fifth-largest economy is facing a slowdown, with expected growth at its weakest point in four years, primarily due to sluggish urban demand and weak private investment.

Sitharaman highlighted that the budget would incorporate several initiatives to assist vulnerable groups, including the poor, youth, farmers, and women. One of the key highlights of the budget is the introduction of "transformative reforms in taxation," including a new income tax bill, which is set to be released next week. The Finance Minister emphasized the government's commitment to long-term economic growth through strategic reforms.

Sluggish growth outlook and the need for structural reforms

India’s economic growth for the fiscal year beginning April 1 is projected to be sluggish, according to the country's chief economic adviser. The report released on Friday indicated that India's economy would face challenges, with weaker-than-expected demand and private investment slowing recovery. Despite this, the government's fiscal outlook remains positive, with targeted efforts to manage the fiscal deficit.

The Indian government has continued to improve its finances, targeting a fiscal deficit of 4.4% of GDP for the 2025-26 fiscal year, down from a revised 4.8% of GDP in the current year. This is seen as a step towards fiscal discipline, aiming to support long-term stability. To fund the fiscal deficit, the government will borrow 14.82 trillion Indian rupees ($171 billion) via the bond markets.

The government also faces the long-term challenge of sustaining higher growth rates. While India’s near-term growth aligns with the 10-year average, economists argue that a growth rate of 8% is needed to meet the country’s economic goals. This rate is crucial not only for economic expansion but also for creating sufficient jobs to support India’s large, youthful population.

Tax relief and job creation initiatives

Economists have suggested that easing the tax burden on individuals could be beneficial in boosting consumer spending. This would include tax cuts on income and energy products, addressing the high cost of living and strengthening disposable income among the public.

Additionally, the government has already laid the foundation for job creation, with a $24 billion program announced in the post-election budget in July. This initiative aims to address the youth unemployment challenge, although the budget announcement offers little in the way of new details regarding job creation initiatives.

The equity markets responded negatively to the budget details, with both the Nifty 50 and BSE Sensex indexes reversing early gains. As of 11:53 a.m. IST, the Nifty 50 was down 0.2%, while the BSE Sensex also registered a decline of 0.2%. Sectoral sub-indexes followed suit, with the fast-moving consumer goods sector and realty sectors leading the losses, each down by approximately 1%.

Inflation and agricultural reforms

India has faced persistent food inflation over the past year, with retail inflation easing to a four-month low of 5.2% in December. However, food inflation, which accounts for nearly half of the consumption basket, remained high at 8.39% in the same month. To address these inflationary pressures and boost productivity in the agricultural sector, the government has announced a national mission to promote high-yielding crops, with a special focus on pulses and cotton.

Furthermore, the government has increased the limit for subsidized credit for farmers from 300,000 Indian rupees ($3,335) to 500,000 rupees ($5,778). This measure is aimed at easing access to credit for smallholder farmers, enabling them to invest in better farming techniques and increase their output.

Driving growth in manufacturing and exports

Another key component of the budget is the government's focus on stimulating India's manufacturing sector and boosting exports. Sitharaman outlined plans for the launch of new missions designed to support manufacturing and exports, although details were scarce. This aligns with India’s long-standing goal of increasing the share of manufacturing in the economy. Despite the ambitious goal of reaching 25% of GDP from manufacturing, the sector’s contribution has remained stagnant at around 17%.

In an effort to further stimulate the economy, the government has raised the foreign direct investment (FDI) limit in the insurance sector from 74% to 100%. This move is expected to deepen the penetration of insurance in India, driving greater investment in the sector and improving coverage for individuals across the country.

Challenges ahead for India’s economic growth

While the 2025-26 budget outlines several ambitious plans, the challenges India faces in boosting economic growth cannot be underestimated. High food inflation and the sluggish pace of private investment remain significant hurdles to achieving the 8% growth rate required to meet long-term economic goals. Additionally, the government's fiscal measures, including borrowing to fund the deficit, raise questions about the sustainability of such approaches over time.

The budget also highlights the need for structural reforms in areas such as land and labor. India's long-delayed reforms in these areas remain critical to unlocking medium-term growth, enabling the country to better harness its potential and attract more investment.

While India's government is making efforts to address inflation, support vulnerable populations, and boost economic productivity, the path to sustained growth is complex. The challenges of food inflation, sluggish private investment, and a need for deeper structural reforms will require sustained effort and bold actions from policymakers.

Looking forward to a more inclusive and dynamic economy

The 2025-26 budget is a pivotal step in addressing some of the most pressing economic challenges facing India today. By focusing on strengthening middle-class spending power, promoting inclusive development, and fostering private investment, the government hopes to secure a brighter economic future for India. However, much work remains to be done to address the underlying structural issues that continue to hold back the country’s potential.

As India moves forward with its economic agenda, the success of these initiatives will ultimately depend on how effectively they are implemented, as well as on the broader global economic conditions that may influence the country's growth trajectory.