India will present its 2025 Union Budget, set against Prime Minister Modi’s goal of achieving a “Viksit Bharat” (developed India) by 2047, marking 100 years of independence. While over the past few years, India has rapidly signed international trade agreements, slowing growth indicators like foreign direct investment (FDI), and GDP pose challenges. Additionally, President Trump’s recent inauguration signals a possible resurgence of tariffs reminiscent of his first term, challenging India’s trade competitiveness and growth trajectory. In the wake of economic challenges, the Indian government must implement swift and effective policy responses to attract greater FDI and instill investor confidence.
The budget offers India a critical opportunity to improve its policy ecosystem and reverse concerning trends. Policymakers must focus on three areas: simplifying the tax code to attract FDI, unlocking tied capital through faster tax dispute resolutions, and investing in emerging technologies to future-proof India’s economy.
Losses—and Wins
The year 2024 saw mixed economic outcomes. GDP growth was estimated at a sub-7 percent level, and FDI inflows faced a 62 percent decline in FY 2023–2024.
However, over the past few years, amidst declining macroeconomic trends, India has reinvigorated trade agreements. On March 10, 2024—after 16 years of negotiation—India and the European Free Trade Association (EFTA) states signed the India-EFTA Trade and Economic Partnership Agreement. The deal marks a significant increment in the relationship between India and the EFTA states (Switzerland, Iceland, Norway, and Liechtenstein), and is an enabler for India in its approach to bilateral trade agreements. This development succeeded India’s progressive dialogue with the Gulf Cooperation Council, where investments have surged by eight times in the last decade. Additionally, India also signed agreements with the United Arab Emirates and Australia.
While trade agreements are welcome, lingering concerns over convoluted taxation, inefficient litigation, and uneven tariffs hinder growth. Addressing challenges inhibiting agreements from realizing their full potential is key to attracting global capital and driving growth.
Simplifying the Tax Code for FDI
FDI in India comes in two kinds: physical assets for manufacturing or infrastructure and services production through investments in global value chains and global capability centers. The success of FDI in services is dependent on how the budget simplifies tax policy.
Driven by economic nationalism, foreign firms face unequal treatment as the government, in a myopic attempt at fiscal consolidation, imposes higher fiscal burdens to boost short-term revenue. This short-sighted approach discourages investment and hinders industrial growth and consolidation. However, in the long term, this disincentivizes foreign firms from participating in India, thereby limiting FDI. For instance, in the mining sector, heavier tax levies have limited foreign participation, despite a market potential of $8.5 billion.
The government should identify possible relaxations and reimagine the new tax code to support industry. The Ministry of Finance, through the budget, should expeditiously set up steering committees to demystify the legislative challenges.
Unlocking Tied Capital
A cursory glance at the FY 2023–2024 figures reveals a petrifying fact: More than $320 billion was tied in extant income tax litigation, amounting to 9.72 percent of India’s GDP for the year.
This is a sore point for investors, who look for certainty in their outcomes instead of being dragged into protracted litigation. Reducing the pendency of disputes and avoiding disputes altogether should be prioritized. Additionally, alternative dispute prevention options, like safe harbors, advance pricing, and settlement under tax treaties, should be explored.
Preparing for Tech of the Future
The tech sector will be a key driver for India’s growth. It is expected to contribute 20 percent of the GDP by 2026 and reach $1 trillion by 2028. Tech-like digital infrastructure will also enhance financial inclusion and further integrate underserved communities into the economic fold. Therefore, the Union Budget of India should incentivize targeted investments in emerging technologies, and leverage these for improving compliance.
The United States is India’s largest market for merchandise and services trade. Last year, the nations resolved their seven pending World Trade Organization disputes, which is an unprecedented development. India and the United States cooperate in major areas of technology and innovation, including agriculture, blockchain, and clean energy. A capitalized response in the form of measures that simplify compliance, rationalize the extant tariff lines, and incentivize the U.S.-India alliance should be the clincher. If congruences are to be arrived at, the budget announcement should prepare for the future and address structural bottlenecks, clearly articulate action plans for boosting cross-border investors’ confidence and propose a metric to propel India as the global market floor.
Additionally, an impact analysis of challenges in India’s faceless assessment schemes and efforts to improve digital financial literacy among officers should be strengthened to increase compliance.
India’s 2025 budget should focus on simplifying the tax code, improving arbitration, and focusing on incentivizing investments in emerging technology areas to secure sustainable growth and global leadership.
Mukesh Butani is a senior associate (non-resident) with the Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies in Washington, D.C., and serves as the managing partner of BMR Legal.