Viksit Bharat and the Budget’s Play with Numbers
02-02-2025
03:39 PM

Context
- The Budget 2025-26 presents significant challenges for the Narendra Modi government in its third term, particularly in addressing slowing economic growth, income disparity, and declining domestic demand.
- While the government attempts to balance fiscal consolidation with populist measures, contradictions emerge in its policies, particularly concerning corporate incentives, tax concessions, and social welfare spending.
- Now it becomes imperative to critically evaluate the key aspects of the budget and its potential implications.
An Analysis of Economic Slowdown and Weak Demand Highlighted by Economic Survey 2024-25
- Declining Consumption Demand
- Rising Income Disparity
- The Economic Survey explicitly acknowledges that income disparity is increasing, leading to subdued demand.
- The wealth generated in the economy has disproportionately benefited large corporations, whose profits have reached a 15-year high, while wage growth has been moderate, and job creation has remained tepid.
- This imbalance means that while businesses are earning more, the purchasing power of the lower- and middle-income groups has not increased significantly, leading to weak demand for goods and services.
- End of Credit-Fuelled Consumption
- In recent years, credit expansion, particularly in the form of personal loans and easy financing options, temporarily boosted household consumption.
- However, this model of growth is unsustainable in the long run.
- As borrowing increases, so do household debt burdens, leading to a slowdown in discretionary spending.
- With interest rates remaining relatively high and consumers becoming more cautious about debt, this source of demand growth is now weakening.
- Inflationary Pressures
- Persistent inflation in essential commodities such as food and fuel has further reduced real disposable incomes.
- While headline inflation may appear under control, core inflation (which excludes volatile items like food and fuel) remains a concern.
- Higher living costs mean that consumers prioritise essential spending over discretionary purchases, reducing demand for industries such as automobiles, consumer durables, and real estate.
- Rising Income Disparity
- Declining Public Capital Expenditure
- Lower-than-Expected Capital Expenditure Growth
- While the government had initially projected a 20% increase in effective capital expenditure, actual spending rose by only 5% in nominal terms, which translates to a decline in real terms when adjusted for inflation.
- This is concerning because public infrastructure investment typically has a high multiplier effect, meaning that for every rupee spent, the economy benefits multiple times over.
- A slowdown in government investment results in weaker job creation, lower industrial activity, and reduced private sector confidence.
- Fiscal Conservatism and Revenue Constraints
- Despite having access to exceptional revenue sources, such as dividends from public sector enterprises, spectrum sales, and Reserve Bank of India (RBI) surpluses, the government has chosen a path of fiscal restraint.
- Lower-than-expected tax revenues and a commitment to reducing the fiscal deficit have led to spending cuts, especially in capital-intensive sectors.
- This approach, while aimed at ensuring macroeconomic stability, may have short-term negative effects on growth.
- Lower-than-Expected Capital Expenditure Growth
- Weak Private Investment and Corporate Behaviour
- Corporate Profits vs. Investment
- Although corporate profits have surged to a 15-year high, this has not translated into increased capital investments.
- Instead of expanding production or creating new jobs, many companies are holding onto their cash reserves, distributing dividends, or engaging in share buybacks.
- This suggests that businesses are uncertain about future demand, which discourages new investments in infrastructure, manufacturing, or employment.
- Global Uncertainty and Weak External Trade
- Global economic conditions have also contributed to lower private investment
- With sluggish global growth, geopolitical tensions, and policy shifts in major economies (such as the U.S. under the post-Trump administration), Indian exports are not expected to be a major driver of growth.
- This leaves the domestic economy with fewer external growth engines, further necessitating an increase in domestic demand and investment, something that is currently missing.
- Corporate Profits vs. Investment
Key Aspects of Budget 2025-26 to Address the Slowdown and Their Implications
- Tax Concessions and Middle-Class Appeal
- A key feature of the budget is the increase in the tax-free income threshold from ₹7 lakh to ₹12.75 lakh, providing substantial relief to middle-income earners.
- While this move strengthens the government’s appeal among the middle class, it comes at a cost—a projected loss of ₹1 lakh crore in direct tax revenues.
- This decision underscores the government’s focus on vote-bank politics rather than broader economic reforms.
- To compensate for this revenue loss, the government has committed to reducing the fiscal deficit from 4.8% of GDP in 2024-25 to 4.4% in 2025-26.
- However, this commitment limits the scope for increased government expenditure, further constraining economic recovery.
- Corporate Incentives and Income Disparity
- The budget reflects a contradictory stance on corporate incentives and economic growth.
- On the one hand, the Economic Survey acknowledges that rising income inequality weakens demand and investment, yet the budget continues to favour large corporations through tax concessions and regulatory reforms.
- For example, the government believes that reducing corporate tax burdens and easing regulations will boost private investment.
- However, with stagnant wages and underutilized industrial capacity, this assumption may not hold.
- The paradox is evident: while acknowledging that rising profits at the expense of worker earnings harms demand, the budget still bets on corporate-led investment to drive growth.
- Foreign Investment and Risks
- The budget extends similar incentives to foreign investors, including raising the foreign direct investment (FDI) ceiling in the insurance sector from 74% to 100%.
- While this move is aimed at attracting more investment, it carries risks—particularly in sectors like insurance, where foreign firms may prioritize profits over consumer welfare.
- Additionally, the government plans to revise India’s bilateral investment treaty template to be more investor-friendly.
- This shift could make India more vulnerable to legal disputes with transnational corporations, limiting its policy flexibility in the long run.
- Given the uncertain global economic climate, relying on foreign investment as a key growth driver appears risky.
Conclusion
- The Budget 2025-26 attempts to balance economic recovery with fiscal discipline, but its contradictions are evident.
- While it acknowledges the need to revive domestic demand and address income disparity, it prioritises corporate incentives and middle-class tax benefits over broader structural reforms.
- Ultimately, the budget reflects a political strategy rather than an economic roadmap, aimed at consolidating middle-class support while maintaining corporate-friendly policies.
- Whether this approach succeeds in reviving economic growth or deepens existing structural issues remains to be seen.
Q1. What is the main reason for the slowdown in India's economic growth?
Ans. Weak domestic consumption demand, declining public capital expenditure, and insufficient private investment.
Q2. How has income disparity affected consumption demand?
Ans. Rising income disparity has led to stagnant wage growth and weak job creation, reducing purchasing power and slowing down demand.
Q3. Why has public capital expenditure not increased as expected?
Ans. Fiscal conservatism, lower-than-expected tax revenues, and a focus on reducing the fiscal deficit have limited government spending.
Q4. What is the government's strategy to boost demand in Budget 2025-26?
Ans. Tax concessions for the middle class, corporate incentives, and regulatory reforms to encourage private investment.
Q5. Why is private investment not increasing despite high corporate profits?
Ans. Businesses are uncertain about future demand, leading them to hold onto cash, distribute dividends, or engage in share buybacks instead of expanding production.
Source:The Hindu