20% rise in capital expenditure to invigorate Indian economy

The anticipation surrounding India’s Union Budget 2025 is building as experts predict significant changes in capital expenditure. A report by global accounting firm EY suggests a 20% increase in capital spending, aimed at stimulating economic growth. This increase is expected to enhance disposable income for citizens and help manage the fiscal deficit, projected at 4.4% of GDP for the fiscal year ending March 2026. As the government prepares for this crucial budget, the focus will be on domestic demand and strategic reforms to navigate global economic uncertainties.

Increased Capital Expenditure: A Catalyst for Growth

The proposed 20% rise in capital expenditure is a strategic move to invigorate the Indian economy. According to DK Srivastava, Chief Policy Advisor at EY India, this increase is essential for restoring growth momentum. The government had set the capital expenditure for the current fiscal year at Rs 11.11 lakh crore. However, spending was hampered by the upcoming 2024 Lok Sabha elections, leading to a shortfall in planned investments during the April to July period.

The report emphasizes that a robust capital expenditure plan can stimulate economic activity. It can also increase disposable income, particularly for lower-income and lower-middle-income groups. This approach aims to create a more equitable economic environment. Srivastava suggests that alongside capital spending, the government may consider rationalizing tax rates and offering income tax deductions. These measures could further enhance personal disposable incomes, thereby boosting consumer spending and overall economic growth.

Fiscal Discipline Amid Economic Challenges

The EY report outlines the government’s commitment to fiscal discipline. The fiscal deficit is expected to decrease from the current budgeted 4.9% to 4.4%. However, some analysts predict that the actual figure may be slightly higher, around 4.8%. Maintaining fiscal discipline is crucial for sustaining economic growth, especially in the face of global economic headwinds.

Srivastava highlights the importance of timely implementation of strategic reforms. He acknowledges potential challenges, such as fluctuations in the global economy and pressure on the Indian Rupee. However, he remains optimistic that with the right fiscal policies, India can maintain its growth trajectory. The focus on domestic demand and private consumption will be vital in achieving these goals.

Path to a $5 Trillion Economy

India aims to become a $5 trillion economy by FY30, and achieving this goal requires an average nominal GDP growth rate of 10.5%. Srivastava believes that with appropriate fiscal policies and reforms, this target is attainable. He also notes that an annual depreciation of around 3.5% in the INR/USD exchange rate is expected.

The report also addresses inflation concerns. The Consumer Price Index (CPI) inflation eased to 5.2% in December 2024, with core inflation steady at 3.7%. This decline in inflation could pave the way for a potential 50-basis-point cut in policy rates during FY26. Such a move could encourage private investment, further supporting economic growth.


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