India Targets Smaller Budget Deficit, Reforms to Boost Growth
Saturday, Feb 1, 2025 2:00 am ET
The Indian government has announced its intention to reduce the fiscal deficit and implement reforms to stimulate economic growth, as outlined in the Union Budget 2025. Finance Minister Nirmala Sitharaman proposed a reduction in the fiscal deficit to 4.9% of GDP for the financial year 2024-25, down from the interim budget's target of 5.1%. This move is part of the government's commitment to maintaining fiscal prudence while increasing public spending to boost economic growth.

The reduction in the fiscal deficit is expected to have both short-term and long-term impacts on India's economic growth trajectory. In the short term, a lower fiscal deficit indicates a more disciplined approach to public spending, which can help maintain macroeconomic stability. This can boost investor confidence and encourage foreign investments, as seen in the World Bank's India Development Update (IDU) which noted that India was one of the fastest-growing major economies in FY22/23 at 7.2%. A lower fiscal deficit can also help keep interest rates in check, making borrowing cheaper for both the government and the private sector, stimulating investment and consumption. Additionally, it can help control inflation by reducing the pressure on public spending, as noted in the Economic Survey 2024-25.
In the long term, the reduction in fiscal deficit is part of the government's plan to keep the central government debt on a declining path as a percentage of GDP from 2026-27 onwards. This can improve India's debt sustainability and reduce the risk of a fiscal crisis in the long run. A lower fiscal deficit can also create fiscal space for the government to invest in infrastructure, education, and other growth-enhancing sectors. This can help India achieve its goal of becoming a developed nation by 2047, as noted in the Economic Survey 2024-25.
The Indian government has planned several reforms to boost economic growth, focusing on various sectors and aspects of the economy. Some of these reforms and their expected effectiveness are as follows:
1. Human Capital Development: Investing in human capital by improving education quality, enhancing skill development programs, and ensuring access to basic healthcare is expected to be effective in boosting labor productivity and overall economic growth. The Global Human Capital Report highlights India's need to improve its human resource capital, which is essential for competing globally. By investing in human capital, India can foster a more skilled and productive workforce, driving economic growth.
2. Technological Advancements: Embracing technology to increase productivity and foster innovation is expected to be highly effective in driving economic growth by improving efficiency across various sectors. Enhancing technology readiness can significantly contribute to economic growth by streamlining processes, reducing costs, and increasing productivity.
3. Labor Market Reforms: Reforming labor laws to make them more flexible and industry-friendly is likely to be effective in attracting investments and generating employment opportunities. Flexible labor laws can encourage businesses to expand their operations, hire more workers, and contribute to economic growth.
4. Land and Property Reforms: Efficient land administration and urban planning are critical for sustainable development and are expected to be effective in promoting sustainable development and attracting investments. Efficient land administration and urban planning can facilitate infrastructure development, reduce costs, and enhance the overall business environment.
5. Fiscal Prudence and Public Expenditure: Maintaining fiscal prudence while increasing public expenditure, particularly in infrastructure and social sectors, is likely to be effective in stimulating economic growth by increasing public investment in critical sectors. Infrastructure development can enhance productivity, reduce costs, and create employment opportunities.
6. Goods and Services Tax (GST) Reforms: Unifying the country into a single market, simplifying the tax structure, and boosting revenue collections has been highly effective in enhancing revenue collections and promoting economic growth. The GST has simplified the tax structure, reduced compliance costs, and boosted revenue collections.
The Indian government aims to balance fiscal prudence with the need for increased public spending to stimulate economic growth by gradually reducing the fiscal deficit while maintaining a focus on infrastructure and social sector investments. This is achieved through gradual fiscal consolidation, increased capital expenditure, the National Infrastructure Pipeline (NIP), focus on social sectors, and revenue mobilization. By following these strategies, the Indian government aims to balance fiscal prudence with the need for increased public spending to stimulate economic growth, while maintaining a sustainable fiscal position.
In conclusion, the Indian government's plans to reduce the fiscal deficit and implement reforms to boost growth are expected to have a positive impact on India's economic growth trajectory in both the short and long term. By maintaining macroeconomic stability, controlling inflation, improving debt sustainability, boosting private investments, and creating fiscal space for growth-enhancing investments, India can overcome the challenges it faces in the global economy.