Budgeting in the time of Trump

For the uncertain times ahead, the Budget must balance growth, jobs, and governance—and the recipe is distinctly unglamorous

- T T RAM MOHAN

Economic policymaking must always reckon with uncertainty. There are times when the uncertainty is acute. The biggest challenge in recent years was the Covid-19 pandemic. It was hard to tell how long it would last. The policy response to it was, however, quite clear—fiscal and monetary stimulus, although nations came up with varying degrees of stimuli.

What looms ahead of the Union Budget for FY26 is, perhaps, even more challenging. Nobody quite knows how the US President-elect, Donald Trump, will proceed with his plans and how other nations will respond. Also uncertain are his stance on the two geopolitical hotspots at the moment, Ukraine and West Asia, not to mention his own additions, Greenland and the Panama Canal. The only known is that the world economy must brace for major shocks. The focus in the coming Union Budget must be to keep the growth momentum going so that the economy is better placed to withstand any shocks that arise.

Going by the latest estimates of the National Statistics Office, the government is likely to fall slightly short of the nominal growth target of 10.5 per cent for FY25. It may still meet the fiscal deficit target of 4.9 per cent of gross domestic product (GDP) because capital expenditure will fall below the budgetary estimate.

For FY26, the priority must be to maintain the central government expenditure at the FY25 level of 3.4 per cent of GDP, at the very least. This must not happen at the expense of capital expenditure by public sector undertakings (PSUs). Total central public expenditure (central government plus central PSUs) must be maintained at the FY25 level of 4.5 per cent.

This could well mean exceeding the fiscal deficit target of 4.5 per cent of GDP for FY26 indicated in last year's Budget. So be it. The imperative is to aim for GDP growth of close to 6.5 per cent in the coming year. It is hard to see any big rise in private investment driving growth in the face of looming uncertainties.