If the current government had a coherent and consistent economic philosophy, it would be possible to predict the main features of the forthcoming budget, barring any surprise packages. Unfortunately, it does not. It has, in the past, swung from capitalism to cronyism, liberalisation to mercantilism, competition to oligopolies, revdi bashing to free grain, and kisan samman to opposing legally-binding MSP. It is prudent to describe the state of the economy and leave it to each one to judge whether Budget 2025-26 was an adequate response to the present challenges.
As I travel around the country and observe people from different walks of life, there is certainly evidence of prosperity. Each of the last three decades has witnessed impressive growth and development when compared to the 1950s to 1980s. Because liberalization opened the doors to millions of people to produce goods and services and find ways to trade in them. Even if there was no government of India, the country’s economy would grow at 5 per cent a year! What governments do through their policies and actions is to impact the growth rate — for better or worse.
Growth Rate Falling
As far as the present situation is concerned, it is generally admitted that the growth rate of the economy is falling. We are huffing and puffing at between 6 and 7 per cent while boasting that India is the fastest growing large economy in the world — which is true. Other large economies are growing at a slower rate: the United States at 2.7 per cent and China at 4.9 per cent. However, we forget that, in 2024, the United States added (in current prices) USD 787 billion to its GDP and China added USD 895 billion to its GDP. India’s faster growth rate added roughly USD 256 billion to the GDP, and the gap between China and India has grown. The lesson: the Indian economy has to grow at a faster rate, and consistently, in order to catch up with the Big Two.
The growth rate is falling because the key drivers of growth are falling: consumption, public investment and private investment. Of these, the decline in private consumption is visible. There is an illusion of a booming economy created by the obscene consumption of a thin sliver of very rich (less than 1 per cent of the population). The middle classes (30 per cent) and the poorer sections (69 per cent) have cut their consumption. Discretionary spending is lower. This is visible in small towns and villages. The private final consumption expenditure (PFCE) numbers (in constant prices), in Q2 of the immediate past are: Rs 22,82,980 crore, Rs 23,42,610 crore and Rs 24,82,288 crore. Government final consumption expenditure (GFCE) is not much better: the numbers for the same three quarters are Rs 3,36,707 crore, Rs 3,83,709 crore and Rs 4,00,698 crore.
Consumption & Investment
The main reasons for sluggish consumption are (1) inflation especially in food prices and (2) low and nearly stagnant wages. In six years between 2017 and 2023, the real wages of agricultural workers (male) has risen from Rs 138 per day to Rs 158 per day. Wages for females are
Rs 40 lower. For construction workers (male), the wage per day has risen from Rs 176 to Rs 205; for females it is Rs 45 lower. These wages per day are a reminder that there are many millions of people struggling to make ends meet.
Public (i.e. government) investment is stuck between 6.7 to 7.0 per cent of GDP (in current prices) during the last 10 years. Capital expenditure by the central government and public sector enterprises has declined from 4.7 per cent of GDP (2019-20) to 3.8 per cent (in 2023-24). Private investment has ranged between 21 and 24 per cent of GDP. If you plot the numbers on a graph, they will appear as a nearly straight line.
Inflation, Unemployment & Taxes
Inflation is a millstone. Food inflation has averaged 6.18 per cent between 2012 and 2024. Healthcare costs have increased at an annual rate of 14 per cent. The rate of inflation in education has been around 11 per cent. According to CMIE, the All India unemployment rate in December 2024 was 8.1 per cent. Breaking the number down by age or education or gender will reveal a more depressing picture.
What is loud in the pre-budget debate is relief to the income tax payers. The number of persons who filed income tax returns in FY 2023-24 was 8,09,03,315 or 6.68 per cent of the population. Of the filers, 4,90,00,000 filed ‘zero tax’ returns. While relief to the taxpayers is important, relief to the daily wage earners is imperative. Other key elements of the current situation are the bedevilled tax structure, especially the convoluted GST that affects all the people including the poor.
The government has acquired the tag of being pro-corporates and pro-cronies. Corporate profits amounted to
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Rs 10,88,000 crore in 2022-23 and rose to Rs 14,11,000 crore in 2023-24. During the two years, scheduled commercial banks wrote off loans to corporates amounting to Rs 2,09,144 crore and Rs 1,70,000 crore, respectively.
The pair of elephants in the room are the fiscal deficit and the revenue deficit.
The people are watching how the government will address these issues. The finance minister and her advisers may have solutions to the problems, but it is the worst kept secret in Delhi that the FM may propose but it is the PM who will dispose.
