Defining Budget Vital To Shield Markets And Economy From Global Challenges

While equity market fluctuations are traditionally not considered a government concern, the current situation demands attention from Finance Minister Nirmala Sitharaman’s upcoming Budget. The total market capitalisation, which stood at ₹484 trillion in September 2024, has shed nearly ₹78 trillion in just four months. For a market that grew 5.5 times since May 2014 and touched 150% of GDP last year, this decline is staggering. Another ₹30 trillion in erosion is a scenario India cannot afford.  

The impact stretches far beyond investor portfolios. This erosion has exacerbated rupee depreciation, can weigh on tax collections, and is causing consumers to defer big-ticket spending, including real estate and automobiles. With equity markets now deeply intertwined with broader economic stability, any significant downfall could strain domestic aggregate demand further.  

Adding to these concerns is the slowdown in manufacturing, projected to grow by just 5.3% in 2024-2025, down from 9.9% in the previous fiscal year. Digitalisation and the shift to e-commerce have displaced manual jobs, while weaker export demand from Europe, US tariffs, and Chinese competition pose serious challenges.  

On the global front, protectionist policies under the new US administration have sparked a strong rally in the Dollar Index, now hovering near a 20-year high. This has triggered cautious capital flow reversals to the US, pushing the rupee to record lows and eroding foreign reserves. Net FDI inflows, which once reached $8.5 billion during April-November 2023, have plunged to just $500 million in the same period of 2024. The Reserve Bank of India has been forced to sell a record $20.2 billion in November alone to stabilise the rupee, depleting forex reserves to a 10-month low of $624 billion. Its net short position in the forward market has risen to $58.9 billion, possibly impacting non-tax revenues for the government through lower dividend transfers from the central bank.  

If US protectionism intensifies and the dollar continues to strengthen, RBI’s currency management could become even more challenging. A prolonged rise in the greenback may also deepen India’s trade imbalance, adding further pressure on the rupee.  

Policy Priorities  

The market expects the government’s boost to the economy. There is nothing much expected in the form of direct measures.  

Given this backdrop, the government needs to prioritise four key areas: boosting aggregate demand, conserving foreign capital, stabilising capital markets, and promoting import substitutes.  

The first priority must be to sustain GDP growth at or above 7%, which requires shifting focus from supply-side measures to demand stimulation. A well-structured tax relief for the middle class could be an effective step. Personal income tax collections grew by 24% during April-November 2024, far outpacing corporate tax revenue, which saw a marginal decline of 1%. Adjusting tax slabs and reducing rates could inject purchasing power into the economy. The government could also consider lowering tax on fixed deposit interest for senior citizens to match capital gains tax on equities, ensuring parity between savings and investment options.  

Another area for policy intervention is the ballooning gold imports, which have drained hundreds of billions of dollars from the Indian economy over the past two decades. While some portion is re-exported, the overall impact remains negative due to excessive domestic leveraging through gold loans. Curtailing gold imports could help conserve forex reserves, stabilise the rupee, and channel households’ capital towards domestic consumption.  

On capital markets, while excessive intervention is not advisable, a targeted approach may be useful. Any possible market capitalisation erosion of over ₹100 trillion would have severe knock-on effects on system’s aggregate demand and the exchange rate. Measures such as limiting tax on dividends and restoring the 20% tax on buybacks could help stabilise investor sentiment.  

To counter external trade pressures, the government should expand anti-dumping duties on select imports, ensuring that US-China trade tensions do not result in a flood of cheap goods into India. The rapid growth of e-commerce and quick-commerce platforms has already disrupted traditional retail. To support domestic businesses, a broader Production-Linked Incentive scheme should be considered, including targeted subsidies for sectors like tourism and hospitality that can absorb displaced workers.  

Moreover, given the severity of the challenges, rigid adherence to the fiscal deficit target of 4.5% for 2025-2026 may not be prudent. Strategic divestments in mid-sized public sector undertakings, reducing government stakes in public sector banks to 51%, and the complete sale of IDBI Bank could partially offset fiscal slippage. Even after the recent market correction, many government-owned companies and banks continue to trade at valuations three to ten times higher than pre-COVID levels. A well-planned divestment strategy could unlock capital while maintaining financial stability.  

The upcoming Budget arrives at a critical moment. With global and domestic headwinds converging, policymakers must strike a delicate balance between fiscal prudence and growth imperatives. The equity market turmoil, currency pressures, and slowing manufacturing sector are interconnected challenges that demand a coordinated response.  

Lifting aggregate domestic demand, curbing unnecessary capital outflows, bolstering production, and supporting investors must be top priorities. India’s domestic investor base has more than doubled to over 200 million in just three years. Extending targeted incentives for them could help stabilise markets, support the rupee, and reinforce consumer confidence.  

Growth should remain the centrepiece of the Budget strategy. Once aggregate demand picks up, private investment will follow. This is not a time for hesitation—bold and timely measures will determine whether India navigates these challenges successfully or risks a prolonged economic slowdown.