After the covid-19 pandemic, India experienced a scorching pace of growth for three years—on an average, the economy expanded by more than 8%. However, the second quarter (Q2) of 2024-25 came as a shocker; the country’s gross domestic product (GDP) climbed, but by a modest 5.4%.
“The government believes that the GDP trend seen in the second quarter of 2024-25 is only a temporary blip and the economy will see healthy growth in the next quarters,” the finance minister said in the Parliament.
Nonetheless, the third quarter (Q3) may not usher in better news, going by advance indicators such as the purchasing managers’ index or early corporate results. They don’t signal any significant recovery. The Reserve Bank of India (RBI) has scaled down 2024-25 GDP growth to 6.6%. The National Statistical Organization, in its first advance estimates, pegged it even lower at 6.4%.
The reasons for the downward revisions are not far to seek. Multiple factors are smothering India’s economic growth. Urban consumption has fallen suddenly and sharply. Exports are showing no signs of revival. All this means private sector investment, critical to power economic growth, is unlikely to revive. In addition to the problem, the rupee has come under severe pressure due to the strengthening of the US dollar. This risks pushing up inflation, which, at 5.2%, is already higher than the Reserve Bank of India’s (RBI) target of 4%.
If these challenges were not good enough, global uncertainties have risen. It is not clear how the US President Donald Trump’s ‘America First’ policies will play out and impact global economic growth. The risk of trade war is high.
The current scenario, therefore, raises a pertinent question: While India’s economic philosophy has largely delivered in the last three years, is it time to tweak it?
Modinomics
The Narendra Modi government has adopted an investment-led growth strategy to accelerate India’s economic growth. Post-pandemic, it has unleashed massive public spending focused on capital expenditure (capex) to bridge the nation’s infrastructure gap and also crowd in private investment. Capex as a share of GDP more than doubled from 1.6% in 2018-19 to over 3% in 2024-25.
It eschewed populism and any form of stimulus, including cash handouts, even as it kept an eagle-eyed focus on fiscal consolidation. The central government’s fiscal deficit as a share of GDP is expected to drop to 4.9% levels in 2024-25 from 9.2% four years ago. It has improved the overall quality of the expenditure by increasing the share of capex and reducing wasteful revenue expenditure. Revenue expenses as a share of GDP are expected to drop to 11.4% in 2024-25 as against 15.5% in 2020-21.
But despite these efforts, economic growth has begun to slow down. The much-awaited crowding-in of private investment is yet to happen in a broad-based manner. Poor wage increases and high inflation have eaten into households’ disposable income, and this has caused urban consumption to tank. The clamour for a stimulus to revive demand has become louder than ever before.
Will the finance minister change the government’s economic approach, go easy on fiscal consolidation, and deliver a strong stimulus bazooka?
Ghost of the past
India’s experience with previous stimulus has been one of pain. To tackle the faltering growth that the global financial crisis caused in the aftermath of the Lehman crisis, the Manmohan Singh-led government offered a strong dose of fiscal stimulus during the 2008-10 period. The move did revive growth but also triggered larger problems. It worsened India’s fiscal situation and fuelled inflation. “The stimulus exposed the supply-side fault lines in the economy. Inflation shot up and the policies to control it smothered growth,” said Sunil Kumar Sinha, professor of economics, Institute for Development and Communication (IDC). The Congress-led United Progressive Alliance government eventually lost power.
“This led to the present wisdom of investment-led growth and the virtuous cycle it typically creates,” he recalled. The present government has been very mindful of the loose fiscal policies of the 2008-10 period and the economic struggle thereafter. “The virtuous cycle has not been triggered to the desired level due to macro-economic conditions and that does not mean the policy is wrong,” Sinha added.
Rishi Shah, partner and economist, Grant Thornton Bharat, too does not expect any change in approach. “China invested year after year to build its manufacturing base for the world. Government is unlikely to abandon the fundamentals that it has focussed on for the last 10 years,” he said.
Madhavi Arora, chief economist, Emkay Global Financial Services, agreed. “Last year, even with elections around the corner, the government neither gave up fiscal consolidation nor turned populist. Why will they do it this year?” she asked.
A token stimulus?
The finance minister may still offer a token stimulus to send a message that the government understands the pain of the middle class and wants to help. Experts blame the fall in consumption on poor wage growth. Between Q3 FY24 and Q2 FY25, the average real wage growth for private non-financial companies was just 3.8%, as against 9.9% in Q2 FY22 to Q2 FY24 period.
Add to this the higher inflation which reduced the disposable surplus in the hands of the people. In this situation, putting some money in the hands of the people may not be a bad idea. “A targeted stimulus may be warranted but has to be crafted in a manner that yields the best results,” said Shah.
The best results come only when people spend money and not save it—that is why any stimulus is seen as a double-edged sword.
Also, consumption is showing signs of revival. It grew 6.7% in the second half of FY25, thanks to better rural demand, as against 4.1% in the same period last year. With inflation also declining thanks to easing food prices, the finance minister may well decide that a token stimulus will be good enough to revive consumption.
Nonetheless, there are other ways to get the virtuous cycle going.
Capex limitation
One big question in everybody’s mind is whether the government’s capex spending is peaking. The growth in allocation has declined over the last two years. As the government cuts the fiscal deficit further, it would not be able to increase capex significantly from current levels.
“We think that public capex has probably peaked and the ability of the centre as well as states to materially contribute to capital asset creation in the economy is likely to be stagnant,” said Arora. She expects the Centre’s capex this year to be at the same level as what was budgeted last year ( ₹11.11 trillion) and as a share of GDP at 3.2%.
Former RBI governor C. Rangarajan is of the view that fiscal consolidation can be maintained without reducing capex as long as the nominal GDP growth is in excess of 11%. But the nominal GDP growth has dropped below 10% in the last two years. It is expected to be 9.7% in 2024-25.
We think that public capex has probably peaked.
— Madhavi Arora
Fiscal limitations apart, there are other reasons as well. “The ability of the system to absorb the allocation has reached its limit,” said Madan Sabnavis, chief economist at Bank of Baroda. In recent years, the allocated money has not been spent. In 2023-24, ₹10 trillion was budgeted but only 95% of it was spent. Last fiscal, the shortfall is expected to be much higher—at around 10%.
Entrepreneurs like R. Dinesh, chairman, TVS Supply Chain Solutions, advocate data-led infrastructure development. “Data on infrastructure gaps is available with the government as part of the Gati Shakti programme. It can be used to identify the right projects and ensure seamless execution. It will help reduce costs and improve outcomes,” he said.
There is also a need to engage the private sector in infrastructure development, particularly in cases where consumers are willing to pay user charges. Urban infrastructure is one such area, experts said. It is working well with roads. Efforts should be made to expand it to other areas as well.
China factor
Much to the chagrin of policymakers, a broad-based private investment revival remains elusive. “It is happening in infrastructure-oriented sectors like steel and cement but not in non-infrastructure sectors such as consumer goods,” said Sabnavis.
The gross fixed capital formation (GFCF), a measure of investment in the economy, stood at 33.5% in 2023-24 as a share of GDP. The peak achieved was 34.3% in 2012-13.

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To ensure higher private investment, Rangarajan said that there is a need to study public investment closely. “Something is preventing the crowding-in from happening effectively. We need to know what it is and dovetail public spending and private investment for best results,” he added.
One significant reason is the excess capacity in China. Sanjiv Puri, ITC’s chairman and managing director, and president of the Confederation of Indian Industry (CII), a trade body, spoke of it recently. Chinese imports into India have more than doubled in the last five years. For instance, India has now become a net importer of steel after many years. “Chinese imports are a factor. The only way to thwart it is to become extremely protectionist,” said Arora.
In addition, the government can announce measures that can make Indian exports more competitive.
A commitment honoured
Meanwhile, the government is expected to continue with the fiscal consolidation process.
“We expect a fiscal deficit of 4.8% in 2024-25 thanks to buoyant tax collection and lower than budgeted capex spending,” said Sabnavis. He expects the 2025-26 fiscal deficit to be budgeted around 4.4%. Most economists agree that the finance minister will honour her commitment to a fiscal deficit that is 4.5% or lower by 2025-26.
From the next fiscal year, the government has indicated that fiscal consolidation will be anchored on debt rather than fiscal deficit. Nirmala Sitharaman had said in her 2024 budget speech that the government will “keep fiscal deficit each year such that the central government debt would be on a declining path as a percentage of GDP”.
The market now is expecting a road map of the extent to which the debt will be reduced. Economists are divided on what the finance minister will do. “You can have a higher fiscal deficit and still show a lower debt. It would be better to give a clear road map on debt reduction,” said Rangarajan. But Grant Thornton Bharat’s Shah feels a glide path can go against the kind of agility that an ever-changing global scenario may require.
The total government debt in 2023-24, Centre and states combined, was 85.3%. “There is an urgent need to bring down the debt as it will create the necessary fire power for the rainy day. India was able to handle the pandemic effectively just because its debt levels were lower at 74.9%,” said Paras Jasrai, senior analyst and economist, India Ratings & Research.
Some good news
The micro, small and medium enterprises (MSME) are showing signs of revival. “MSME credit growth during the October 2023-November 2024 period was 14.2%, indicating recovery,” Jasrai pointed out.
Various efforts, such as the credit guarantee scheme, appear to be paying off. “The latest periodic labour force survey indicates that the share of salaried persons in the overall labour force has increased to 23.2% in 2023-24 from 22.3% the year before. This would not have been possible without the revival of the informal sector,” he added.
The informal sector accounts for 75% of the non-agriculture jobs in the country. There is still some way to go. Pre-pandemic, the share of salaried persons in the overall workforce was 25.2%. The government needs to double down on the implementation of the credit guarantee and other schemes to accelerate the revival of the informal sector.
Though people’s expectations soar around this time every year, experts have argued that the budget is more a statement of intent. This year will be no different. Companies, economists and investors would closely monitor the signals the budget sends.