Budget 2025 Expectations: What Will FM Nirmala Sitharaman Have For MSMEs? Deloitte Economist Decodes

Amid economic uncertainties, Finance Minister Nirmala Sitharaman is going to present the Union Budget 2025. Republic Business spoke to Rumki Majumdar, India Economist on Deloitte on the range of economic issues from Union Budget to RBI rate cut and rupee depreciation.  Majumdar in a freewheeling conversation also outlined a key challenge the Indian economy is grappling with. 

Edited Excerpts: 

On Three Things To Watch Out For In Union Budget

So first is capex. I think that India needs a much more integrated approach to investing in capex. So if roads and rails are being built, they are built in conjunction with each other so that they complement the investments. The productivity of these investments is much higher. So one that second would be employment and skilling.

Very important because we need the creation of jobs, we need people to have more jobs so that they can spend. And this is where the private sector can play a very important role. So the government will incentivize, ensure new schemes are coming up for interns and which the government did last time. Third would be the MSMEs. I think they are the pillar of the economy. They are the biggest employers.

If India needs employment creation at grassroots levels, at a broad-based level, MSMEs have to be given the right impetus to grow in the right environment, and more formalization of MSMEs is needed. And I think technology can play a very important role in ensuring that digital platforms help these MSMEs get to a broader consumer base. They can reach out to bigger, go beyond the borders, and get a larger consumer as their clients and this is something that will be looked forward to.

So I think digital infrastructure spending and boosting MSMEs will be the. 

On India’s Consumption Crisis

Indeed, consumption is the biggest driver for growth and given the importance it has, there is a need to push the consumption demand because it has to grow sustainably to ensure that investment keeps flowing in. Right now the good news is that the rural demand is kind of sustained, seeing a sustained pickup thanks to the agriculture output. Urban demand may have become a little moderate.

But what I see is that given that the services sector is doing well, which contributes a lot to the urban income, and there is also the wealth market, which is doing well despite all the FII outflows and volatility, capital markets have been very stable. So all this will contribute to the urban income as well.

So what we expect is that the government has to ensure that the one at the rural side, they ensure that the food supply chain is managed well so that income to farmers is consistent. There is enough innovation and technology that is used to improve productivity that will help farmers and rural income. They have to ensure that the construction and infrastructure investment continues because that will bring money into the hands of the rural people. On the urban side, I think that the government will have to ensure that inflation is under check, they have to ensure that the services sector gets the right boost.

Because right now services are doing excellent, be it in terms of contribution to GDP, be it in terms of exports, that segment is excellent. If it can be boosted through proper skilling, proper incentives, and even the startup culture, then it will also help the urban demand as well. 

The rural and urban demands, actually go together. If one does well, the other kind of follows. 

So in a way there has to be a sink and the government will have to balance both. It's a virtuous circle that has to kick in.

On Employment And Skilling

Yes, employment is a must in India. Given that India is one of the populous countries, it has a rising number of graduates who are coming into the labor force every year. And it becomes very important that they get the right opportunity.
Because when we talk about a demographic dividend that can come only when they have enough money, they have enough opportunities to scale up or to consume. So employment is important. And what we believe is that going forward, the government would have to ensure that it incentivizes the private sector to generate more employment.

Because at the end of the day, it is more a responsibility of the private sector than the government to create employment. Because the government can enable or create an ecosystem. It's the private sector that will have to ensure that they are investing in the skill in the employment creation and also ensure that the wages are keeping at par with inflation and the kind of standard of living that people need to maintain.

So that is where I think the government, if you look at the interim budget emphasized employing the young, the employing the fresh graduates, and that is something the government will have to do. Right. And I think this gum, this, this budget will probably like a large segment of the announcement will be around employment.

I'm pretty sure about that. And Skilling, and specifically in technology skills.

On Fiscal Deficit

Even during the pandemic, they were very, very prudent about how they were spending. They ensured that it's quality spending over volume spending. And this is very important because the government wants to give a very consistent signal to investors that they have control over their finances, which is very important. After all, at the end of the day, investors need to be assured that when they are investing their money in a safe country, and this is one of the indicators every global investor looks at how responsible is the government in terms of its expenses or managing its finances.

That is why the government has been consistently making sure it is reducing its fiscal deficit even though even countries in the West, still have not been able to manage the fiscal deficit. Yet India has so few resources compared to the west, and they have managed their finances so well.

And this trend will continue because going forward, if we are, if we want to get to the Viksit Bharat or if we want to achieve those milestones, we need money. We need money from foreign investors. And that's why the.4.9 this year, and 4.5 next year is something that the government will keep an eye on. This year it could be lower, but again this time growth also kind of came down than what we had expected earlier.

The nominal GDP, if it's lower than it probably may not achieve a target of 4.8. But 4.9 is something the government will try to do.

On Fiscal Deficit Of India In Comparison To Its Peers

India is definitely in a very comfortable position if you look at it and in the deficit of other countries. Of course, I do not have any number to quote right now, but all the other countries have either kept it at the levels of the pandemic where they are or probably reduced it by a margin. We have probably halved our fiscal deficit from 9.1% in 2021-22 so we are kind of coming down to 4.9% this year. That is a commendable effort. And what you have, what we have also seen, if you look at the expense, the portfolio, the revenue expenditure, and capital expenditure, that ratio has actually come down. Capex's share has gone up quite significantly.

This means the government knows that if it has to spend, it has to spend what is productive, is much more long-term. And this is what I think the Keynesian theory of economics also says at a time when we are not having enough private sector jumping into an investment, it is the government's responsibility to ensure that the wheels keep moving right. And the way they would do it is where the multiplier effect of the spending is the max.

And this is where if you spend it on infrastructure, not only it helps in bringing down logistics costs, which it has and is doing it will going forward even more, but it also creates employment, it is creating assets, it is creating jobs, income, and in the hands of the people who are in the rural economy or the Suburban economy. Right. It is also kind of giving a motivation for private investors to come in because they can see the competitiveness of the countries improving.

So in different parameters it kind of ticks all the boxes. That's why the government has, I think, done a fantastic job of being prudent, being not extravagant about its spending, and has managed very well. Also when you talk about private capex, let me just come to this question because we know private capex has been a pain point for a long period.

On Capex
See, yes, at a time when the private sector doesn't step up, it's the responsibility of the government and I think what the government is kind of communicating is that it will do what it can and it will continue to do as long as it's needed.
Now, given that I think the private capex is also picking up. If there are, there are. Last year was a year of uncertainty because we had elections not only in India but also in the US and both of these two economies impact investment decisions.

Now those two uncertainties are out of the way. Now there will be some uncertainties that will continue, like for example, the geopolitical uncertainties, how the trade relations will pan out in the US and how will it impact global trade, global investment, capital flows, what will be the decision of the Fed going forward? All these uncertainties will be there. But what the investors would do is they have.

They will have to factor in these uncertainties and decide going forward because now they know India has a stable government for the next five years, and the US has a stable government for the next four years. Whatever uncertainty comes, they probably have to make sure that whatever investment they need, they start doing it now rather than postponing or pushing any investments. So I think also the Capex spending that the government has done so far, the PLI schemes that the government has, that we are seeing the PLI now being realized on the ground.

So all these will start when they start kicking in and it is usually an exponential growth. It initially takes off very slowly, but once it takes off it takes off very fast. And I think this is the year where we will see all the things, bits and pieces that we're moving separately will come in sync and it will help CapEx grow in the private sector.

Also, since we are talking about capex, what is the kind of Capex allocation you're looking at this time? Any step-up you expect this time? Yes, of course, stepping up will be there. Now the question is, I think this year we did lag a bit because of this. We lost out for six months of bringing in the amount of Capex that we needed to do so There is a lot of catching up that needs to be done.

So the next four months, I mean starting from December, I think the capex will pick up and the government will probably increase it by another 20-30% to ensure that the message is clear. The government wants investment in India. It is in attracting investments.

I mean who would have thought five, or six years back that infrastructure would attract FDI? Now infrastructure is attracting FDI. Right. That is the level of competitiveness we have gone to.
Right. And that is the message. I think the government will continue because if it has its skin in the game, there will be other investors who will also invest in India as well.

On Trump Presidency and India

I would see it positively, yes, because he has been very vocal about his stance on China. But then the US would want to have its presence in Asia and the next big bet is India. India and the US have had a very good relationship over the last few decades. That is where I think both countries would try to leverage that relationship. And the US will also. If you look at the number of collaborations that we have done in the space of semiconductors, and in the space of defense, it kind of tells that we have had very strong ties and will continue to do so because the US would like to have its presence in Asia via India and India.

Again, one of the big advantages is that India is one of the biggest services exports and has very strong trade relations and services is something where the US may not impose as many restrictions as what they are targeting for manufacturing. So if that happens, we will be big service partners with the US and we will likely see a lot of investments coming in. So in a way it might benefit us.

But again, the fact that there might be restrictions on manufacturing which will impact our exports, of course. But I think where we need to play our game is up our game in the services sector, that is where I think we can bet big and tire those relationships to make the relationship much stronger with the US Right? Also, one phenomenon that we have been seeing for a long time is FPI pullout and FIIS pullout from Indian markets.

On Interest Rate Differential

We are in a positive range right now.

If you look at the interest differential between the US and India, again the differential is rising because the Fed decided on two rate cuts last year. And RBI is still on pause. Now RBI will likely keep an eye on how inflation moves. Now, till last year, food inflation was the biggest challenge and that's kept inflation high.

This year there will be pressure from imports because most likely if the US goes with restrictive trade policies, there will be inflationary pressures. The US will see inflation and if the US sees inflation, we will be importing inflation, which means again the inflationary pressures will be rising. So in a way, RBI will keep an eye on how inflation moves over the next few months until it is convinced that inflation is not sustainably down or the last mile.

If inflation is not met, and criteria are not met, then it may not go for a rate cut. So we are pinning very. 

Are you expecting a rate cut in Feb? 

Most likely not. Most likely not. Because we still have quite a few risks coming from all around. And the one factor is the constantly elevated inflation. 

Because in the last three, or four months inflation has been quite higher than what RBI would have wanted that to be. And even though RBI has room to cut rates, because as I said, the interest differential is good, there is a motivation to keep that interest differentially good because it attracts investments. We do investments and need investments.

However, the government thinks that the RBI should go for rate cuts. We need credit in the economy. And if you look at credit growth, it has come down agreeable.

But what we also need is responsible credit growth. And if the RBI has decided to ensure that growth in the credit in the unsecured segment is lower, there is a good check and balance that the RBI is doing, which is commendable. Now we need credit growth.

But if you look at the growth in credit in the MSME sector, in the small and medium industries, that has been growing and that is a segment we need the growth to be. So there is a segment that is borrowing, they are investing. But what they need is to ensure that the bank balances do not come under pressure.

They also need to ensure that the inflation is sustainably down before they can go for a rate cut. What they can do is ensure the government can ensure the supply side is taken care of because a lot of this inflation challenge has been a supply-side problem.

If the supply side is taken care of, then in that case inflation can come down, and that gives the RBI the possibility of going for the next rate cut as soon as possible. 

On divestment
See government needs resources, it needs money if it wants to plug money into productive assets. But they cannot even throw away assets at throwaway prices. If they are not getting the right value for their assets, then it doesn't make sense. Second, the process itself is quite complicated.

You want to sell one part, maybe the buyers are not willing to take it as a whole. So how do they even go with the process? So there are a lot of complications and I think they're figuring that out. But over time they have realized that they need to diversify their sources of resources that they need for investments and they may not be able to count on divestment as a policy as such.

So that's why you probably see the emphasis coming down over the years. But I think the government is trying its best to ensure it gets the right value for the asset it has. 

One Big Challenge For Indian Economy

I think it would be inflation because if inflation is low, it opens up a lot of avenues there. Other policies will move, but inflation hits the consumers very directly and very in the short term itself. And if inflation continues and over the last five years inflation has been really below 4% like there has been only three, four months in between where it went down below 4. Otherwise, it has been always above the RBI target rate. So if inflation is not down, it builds into the inflation expectation. People change their behavior.

And if you need consumer demand, which is 55 per cent of your GDP, you need to ensure that consumers are spending and they are not worried about their purchasing power. So I think that is something which would be a primary focus and yeah, employment.