Prof M K Bhat
The recent projection of a 6.4 percent GDP growth rate by the National Statistical Organization, using data from the first seven to eight months of the financial year 2024-25, not only highlights a troubling economic slowdown but also sets the stage for budget considerations for 2025-26. This figure represents a decrease from the finance ministry’s earlier estimate of between 6.5 to 7 percent as indicated in the Economic Survey 2023-24. Additionally, it falls below the Reserve Bank of India’s latest estimate of 6.6 percent for the current fiscal year ending March 2025. The downturn is particularly evident in the manufacturing sector, where the share of Gross Value Added (GVA) has dropped from 9.9 percent in 2023-24 to 5.3 percent according to NSO’s advanced projections. Mining and quarrying have declined from 7.1% to 2.9%, while agriculture stands out as a positive development, increasing its share from 1.4% to 3.8%. Urban areas are experiencing a more significant drop in demand for goods compared to rural regions. If this economic downturn isn’t addressed in the upcoming budget, it could jeopardize the government’s goal of achieving a ‘Vikshit Bharat’ (Developed India) and might lead to a reduction in public welfare expenditures. This slowdown can largely be attributed to weakened demand, both domestically and internationally.
On the international front, a wave of global uncertainty has emerged over the past two quarters, driven by conflicts between nations, shifts in China’s economy, and the U.S. elections. The situation has been heightened by Israel’s recent military actions against neighboring countries such as Lebanon, Syria, and Iran, significantly impacting investor confidence. Furthermore, the ongoing Russia-Ukraine conflict, combined with the Israel-Iran tensions escalated in October, briefly affected oil prices and disrupted global supply chains. Additionally, emerging markets, including India, faced capital outflows following stimulus measures announced by China on September 25, 2024, aimed at resolving its economic challenges stemming from a struggling property market and low consumer confidence. This package included monetary easing and stabilization efforts intended to boost key sectors. Despite these measures, foreign direct investment (FDI) saw a steep decline, reminiscent of levels observed at the onset of the COVID-19 pandemic. Lastly, the uncertainty surrounding U.S. election outcomes poses potential shifts in trade and investment relations, with the likelihood of higher tariffs adversely affecting India’s export growth and current account balance.
Domestically, the slowdown can be traced back to high inflation rates in food items, inadequate employment opportunities, elevated taxation, Goods and Services Tax (GST) complexities, and decision-making delays due to election-related factors. India’s retail inflation has remained volatile, primarily driven by rising food prices that have consistently exceeded the Reserve Bank of India’s target of 4 percent this year. In October 2024, the Consumer Price Index (CPI) surged beyond the RBI’s upper threshold of 6 percent, reaching a concerning rate of 6.21 percent. Particularly troubling is the soaring price of vegetables, which displayed double-digit inflation, striking at 42.18 percent in October 2024, adversely impacting consumer spending. Persistent food price increases ripple through core prices, which are gradually rising despite the RBI maintaining its policy rates at 6.5 percent since February 2023.
Currently, both the central and state governments allocate over Rs 9,00,000 crore in subsidies to support the bottom 60% of the population. While this may provide political leverage in a democracy like India, it comes at the cost of stifling economic growth. Consequently, the middle class bears a disproportionate tax burden, leaving them with limited disposable income.
The reduced purchasing power of consumers is evidenced by a drop in GST collections in December 2024 compared to November, showcasing a 3% decline. Decreased demand has prompted companies to retain wage levels, resulting in low employment and high taxation, ultimately leaving people with minimal spending capacity.
Moreover, the low disposable income is a direct consequence of reduced government capital expenditure, with the budget allocating 11.11 lakh crore for capex but only 5.3 lakh crore being spent by November 2024—a figure that represents a 12 percent decrease from the previous year. These factors have culminated in a significant contraction of domestic demand for goods. Increasing domestic consumption is a pressing challenge heading into the 2025-26 budget.
On the supply side, improvements in bank balance sheets over recent years, along with a decline in non-performing assets, have led to greater bank willingness to lend. Corporates are poised to seize opportunities if demand strengthens.
The Finance Minister faces a dual challenge: to combat the economic slowdown and sustain a higher growth rate while remaining vigilant about price stability and social welfare. A balanced approach is crucial for fiscal consolidation, involving strategic investments in manufacturing, simplifying regulatory frameworks, enhancing the ease of doing business, and focusing on areas such as skill development in emerging sectors like AI. Furthermore, a simplified GST system is essential for improved compliance. To stimulate domestic demand, providing tax relief for the middle class, creating job opportunities, directing capital expenditure toward vital sectors, and investing in infrastructure can significantly boost consumption and economic momentum. In essence, initiatives that focus on job creation are vital. As domestic consumption rises, it will be contingent on individuals’ disposable incomes, which are influenced by inflation, employment rates, and taxation policies.
People desire jobs, and increasing employment opportunities will enhance their purchasing power, positively affecting wage rates. To foster job growth, emphasis should be placed on the Micro, Small, and Medium Enterprises (MSME) sector, known for its high job-creation potential at low investment levels. It is worth noting that credit to the MSME sector showed robust growth in the second quarter of FY 2025, with micro and small enterprises increasing by 13.4 percent and medium enterprises by 20.5 percent, indicating an uptick in investment and expansion within the sector. This indicates strong potential for job creation.
The labor-intensive infrastructure sector can also play a vital role in stimulating demand for goods, contributing to the government’s objective of fostering sustainable industrial growth in the country.
Additionally, agriculture and tourism represent key sectors for job creation. Encouraging agro-based industries and integrated farming, alongside promoting new tourist destinations and upgrading existing facilities, can significantly enhance employment opportunities and elevate demand.
A high economic growth rate is only beneficial when it effectively generates jobs; otherwise, it leads to greater economic disparity and concentrates wealth in fewer hands, posing severe risks to societal stability.
(The author is Professor at Guru Gobind Singh Indraprastha University, Delhi)
