India Budget Preview: Balancing Growth and Fiscal Prudence: What to Expect from Budget 2025

India’s economic growth, while resilient, has slowed in recent quarters. GDP growth decelerated to 5.4% in Q2 FY25, the slowest pace in two years. Several factors have contributed to this slowdown, including reduced government spending, weak rural demand exacerbated by suboptimal monsoon rains, and persistent inflationary pressures. At the same time, global economic headwinds—including geopolitical tensions and monetary tightening in advanced economies—have put additional strain on India’s external sector. The upcoming budget, therefore, will need to balance short-term fiscal stimulus with long-term economic sustainability. With several state elections due in 2026, this budget is also likely to be politically sensitive, ensuring that the middle class and businesses, receive tangible benefits. Here’s what to expect from the upcoming budget based on current economic conditions and policy signals. 

Boosting Consumption and Job Creation

Private consumption, which accounts for nearly 60% of GDP, has been under pressure due to weak rural demand and stagnant wage growth. To counteract this, the budget is expected to introduce measures that directly and indirectly enhance consumer spending. This could include targeted support for rural employment schemes such as MGNREGA, higher allocations for food and fertilizer subsidies, and incentives for key job-generating industries like textiles, MSMEs, and construction. The government in the run-up to the budget has already announced an INR 7tn credit scheme to MSMEs. The scheme aims to facilitate collateral-free loans from banks and financial institutions, enabling enterprises to acquire plant, machinery and equipment for expansion. This we expect will directly feed into the government's agenda of boosting manufacturing to support job creation. 

The government is also likely to announce specific incentives for the manufacturing sector, particularly under the Production-Linked Incentive (PLI) schemes. With a strong focus on “Make in India,” additional policy measures could be introduced to attract investment in high-employment sectors such as electronics, pharmaceuticals, and semiconductors. Additional allocations are expected for specific industries under the PLI scheme and new industries could be added to the scheme as well. 

Additionally, the budget may include measures to boost housing demand, such as higher tax exemptions on home loans or increased incentives for affordable housing projects. 

Tax Reforms and Relief for Individuals

One of the most anticipated aspects of FY26 budget is potential changes in income tax slabs. The government is reportedly considering tax cuts for individuals earning between INR 1mn to INR 20mn annually. This segment forms a significant part of India’s salaried class, and providing relief here could stimulate discretionary spending, benefiting sectors such as consumer goods, automobiles, and housing. However, contrary to the public expectations, our view is that there will be no substantial tax cuts. The government has a large subsidy bill and will at least maintain capital expenditure at same level as FY25, and therefore will not trim revenue collection significantly. As opposed to tax cuts, the government may consider an increase in standard deductions (exemptions) to counteract the impact of inflation. Changes to capital gains tax structures, particularly on equity investments and real estate transactions, are also on the table to encourage long-term investments. Any revision in capital gains taxation will impact market sentiment. 

Infrastructure Push: Capital Expenditure to Rise

Over the past few years, India has significantly increased its capital expenditure, focusing on roads, railways, ports, and airports. However, this trend is unlikely to continue in the FY26 budget. In the past capex has grown 12-15% y/y, but this year, capex growth will likely be 3-5% . Nonetheless, the government's key projects will continue over FY26. 

Key infrastructure priorities could include:

• Continued investments in the PM Gati Shakti initiative to improve logistics efficiency.
• Expansion of railway modernization and new high-speed corridors. Increased allocation for railways is expected. 
• Boosting urban infrastructure through smart city initiatives and metro rail projects.
• Investments in renewable energy projects, particularly solar and green hydrogen, to support India’s decarbonization goals.
• Given the fiscal constraints, the government may also explore more public-private partnerships (PPPs) and push for asset monetization to fund infrastructure projects.

Pivot From Divestment Strategy 

A shift in the government’s approach to privatisation is also likely. While previous budgets emphasized aggressive disinvestment, we expect that the government may pause the sale of certain state-owned enterprises (SOEs) and instead focus on reviving them through strategic investments. For instance, the aviation sector could see fresh government investment in Pawan Hans, while other SOEs in defense, railways, and heavy industries may receive capital infusions to enhance their profitability. This shift underscores both limited investor interest in the enterprises and hurdles witnessed in privatisation (such as labour concerns). 

Fiscal Consolidation and Deficit Targets

Despite the need for stimulus, fiscal prudence will remain a key consideration. The government is likely to maintain its fiscal deficit target at around 4.5 of GDP for FY26, aligning with its medium-term roadmap to bring it below 4.5%. This means that while some tax relief and expenditure increases are expected, they will be carefully balanced to avoid excessive borrowing. One way the government could finance additional spending without significantly widening the deficit is by improving tax compliance. The use of AI-driven tax monitoring and increased scrutiny on high-value transactions are expected to boost direct tax collections, offsetting revenue losses from tax relief measures.

Budget 2025 is likely to focus on a mix of tax relief, infrastructure investment, and job creation while ensuring fiscal discipline. The government’s ability to balance short-term electoral considerations with long-term economic imperatives will be key. While there is limited scope for extravagant spending, strategic allocations in consumption-boosting policies, manufacturing incentives, and infrastructure development will define the budget’s direction.