On Tuesday, India’s Prime Minister Narendra Modi’s coalition government will unveil its first federal budget following a narrow election victory. This budget comes at a crucial time as Mr. Modi, now more dependent on coalition partners, is expected to adjust his spending policies while maintaining fiscal discipline.
Analysts predict that the new government will need to pay more attention to the rural population, which has not benefited as much from India’s rapid GDP growth. A significant challenge is the ongoing jobs crisis, which is driving Indian workers to seek employment abroad, including in Israel.
Rathin Roy, a former member of the Prime Minister’s Economic Advisory Council, suggests that Modi’s third term will focus on leaving a lasting legacy, particularly in terms of economic prosperity for the masses. Roy notes that job creation is an area where Modi has previously struggled.
Over the past decade, Mr. Modi has invested heavily in state-funded infrastructure, including sea bridges and expressways, while implementing tax cuts for large corporations and subsidies to boost export-focused manufacturing. These measures have stabilized India’s macroeconomy and driven stock market growth, but have also exacerbated inequality and rural distress.
Despite record sales of luxury cars like BMWs, overall consumption growth has been the lowest in two decades. Stagnant wages, declining household savings, and a lack of well-paying jobs highlight the economic disparities. Regional imbalances are stark, with northern and eastern India suffering from lower per capita incomes and poorer health outcomes compared to other regions.
A recent survey shows that nine out of ten economists believe chronic joblessness is the biggest challenge facing Modi’s third term. The same survey indicates that seven out of ten Indians support taxing the super-rich, and eight out of ten economists agree that economic growth has not been inclusive.
Travelling through northern India, the disparity between urban and rural areas becomes evident. In Muzaffarnagar, Uttar Pradesh, farmers like Sushil Pal struggle with high costs and low crop prices. Pal, who once supported Modi, did not vote for his party this time due to unfulfilled promises to double farm incomes.
Local businesses ar also feeling the strain. Rajneesh Tyagi, who owns an export-focused furniture workshop, has seen his turnover drop by 80% in five years. Rural distress and high farmer debt have reduced local demand, affecting Tyagi’s business.
According to India Ratings, a credit ratings agency, 6.3 million enterprises shut down between 2015 and 2023, resulting in the loss of 16 million informal jobs. Meanwhile, profits for India’s 5,000 listed companies rose sharply by 187% between 2018 and 2023, partly due to tax cuts.
Addressing the divide between the formal and informal sectors of the economy and bringing prosperity to India’s villages will be key challenges for Modi’s government. Economists at Goldman Sachs suggest that the first post-election budget might focus more on welfare without neglecting capital spending on infrastructure.
Rajesh Saluja, CEO of ASK Private Wealth, believes poverty reduction will be on the government’s agenda, achievable without disrupting fiscal balance due to strong revenues and tax collections. However, economists warn that cash handouts are not a substitute for genuine reform-led development.
The budget must outline a plan to integrate millions into the workforce and boost earning potential. Sunil Kumar Sinha of India Ratings emphasizes the need for policies that support both formal and informal sectors.
To meet domestic demand, India should incentivize low-end, labor-intensive manufacturing in sectors like textiles and agri-food processing, suggests Rathin Roy. Extending production-linked incentives to small enterprises could also help.
Overall, the upcoming budget will be a critical test for Modi’s government as it seeks to address the jobs crisis and promote inclusive economic growth in India.
