It is now no secret to anyone that the Indian economy is not in good shape. Despite the attempts of the Economic Survey to present the situation in the best possible light and the cherry-picking of data to suit its optimistic view, the facts are undeniable. For some years now, the economy has suffered from inadequate domestic demand even as global export shares remain very low at less than 2.5%.
The slow growth in domestic demand — despite an explosion in incomes at the top of the distribution — is driven by poor performance in employment generation (which has fallen if unpaid workers are excluded from the employment data) and stagnant, even falling, real wages, according to the official labour force surveys. The continued policy neglect of agriculture has also suppressed farmers’ incomes. Micro, small and medium enterprises (MSMEs employ around 85% of all paid workers) suffered body blows over the past decade on account of demonetisation, the goods and services tax, and a brutal lockdown policy during the Covid-19 pandemic. So it is almost a miracle that they survive at all.
All this, in turn, has affected private investment, which has barely picked up despite the numerous tax incentives and other subsidies that the Central government has been throwing at it in the past decade. The large corporate sector has got even more concentrated, with only a few favoured business houses growing, often by cannibalising smaller ones. As a result, public investment is the only reason that total investment rates have remained stable, even though the expected ‘crowding-in’ effects of public spending on private investment have not materialised.
Given this context, it should be obvious what needs to be done: sharply increase public spending on essential social services, which improves welfare and can generate millions of jobs; provide secure and stable incomes to cultivators by implementing some of the very sensible demands made by the farmers’ movement; address the problems of MSMEs through a comprehensive policy package that creates at least a semblance of a level playing field with larger businesses. Since all this will require much more public spending, it is necessary to raise additional taxation from the ultra-rich in India who currently have lower effective tax rates than the middle classes. This will provide essential revenues for the government and make a small dent in our obscene economic inequalities. For a change, the Union finance minister’s budget speech at least exhibited some minimal awareness of the problems. She noted “four powerful engines” of growth towards the destination of “Viksit Bharat”: agriculture, MSMEs, investment, and exports.
Incidentally, this regime has kept changing its goals. Does anyone remember the doubling of farmers’ incomes, which was originally supposed to occur by 2022, that is three years ago? Or the goal of a $5 trillion economy, which was supposed to happen last year? This time, the Narendra Modi government has been smarter about its declared promises. The goal of Viksit Bharat has been cleverly placed far ahead, for 2047, by which time the present rulers may be nowhere to be found.
The problem is that having recognised the challenges, the finance minister proceeded to do nothing substantive about them. The budget speech promises “transformative reforms across six domains. During the next five years, these will augment our growth potential and global competitiveness. The domains are: 1) Taxation; 2) Power Sector; 3) Urban Development; 4) Mining; 5) Financial Sector; and 6) Regulatory Reforms.” But none of these deals with the real problems of job creation, agriculture and rural livelihood. Ironically, some of them are actually going to make the lives of most Indians even more fragile and insecure. For example, the few paltry schemes announced for agriculture do not even recognise the most basic demand of a statutory minimum support price that farmers have been correctly asking for which would also enable sustainable crop diversification if designed properly. In fact, the total budget for the ministry of agriculture has come down, from Rs 131,395 crore in the revised estimates for 2024-25 to a budget estimate of Rs 127,290 crore for 2025-26. This is a decline of nearly 3% in nominal terms, which means a much bigger fall in real terms. Clearly, the government is not really concerned about doing anything meaningful for farming, which still accounts for half of India’s workforce and provides a livelihood for more than two-thirds of the rural population. This callousness will add to the problem of inadequate demand.
Similarly, for the MSMEs, the finance minister announced a flurry of schemes but the total outlay remains a paltry Rs 23,168 crore, increasing by less than 5% from the previous year’s budget outlay. In any case, in the current year, the government apparently plans to underspend on this already low outlay, with more than one-fifth of that outlay not being spent. Once again, this is all about lofty statements, but without putting the money where the finance minister’s mouth is. In this context, providing some minor income tax relief to the salaried middle class will simply not deliver in terms of reviving mass demand in a slowing economy or improving employment prospects. So the basic economic problems remain unresolved.
In the meantime, we should be concerned about some other supposedly minor statements that have slipped into the finance minister’s budget speech. She has promised that “The FDI limit for the insurance sector will be raised from 74 to 100 per cent. This enhanced limit will be available for those companies which invest the entire premium in India. The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified.” Given the extensive exploitation and scams occurring in the global insurance industry, this is a recipe for disaster and the same middle class that may be celebrating tax relief should beware of this.
Similarly, the budget speech says, “Requirements and procedures for speedy approval of company mergers will be rationalized. The scope for fast-track mergers will also be widened and the process made simpler.” Are these procedures, one wonders, being made simpler for the government’s crony capitalists who are happily eating up rival businesses?
Jayati Ghosh taught Economics at Jawaharlal Nehru University and is now Professor at the University of Massachusetts Amherst
