By Aftab Ahmed and Ira Dugal
This year’s Indian budget was especially important. It’s the first full budget under Prime Minister Narendra Modi’s third term. It indicates how India’s economy, the fifth largest in the world, plans to handle challenges like reduced growth and lowering markets.
Instead of focusing on long-term reforms, the budget mainly offered immediate relief. There were tax cuts for the middle class, which some view as a missed opportunity to implement meaningful changes that could drive rapid growth again—a growth rate that was once above 8%.
The budget also reduced the government’s focus on capital spending and infrastructure development. These areas are crucial for India’s growth ambitions, especially after the pandemic’s economic impact. Analysts expressed frustration, noting that without a clear plan for restoring high growth and creating jobs, the budget left much to be desired. Many are worried about weak earnings and the departure of foreign investors.
“India aims for 8% growth, but we lack a strategy to achieve it,” said Madhavi Arora, chief economist at Emkay Global Financial Services. The government projects that India’s GDP growth will slow to 6.4% this financial year, with little improvement expected next year.
While tax cuts might benefit urban consumers who have been struggling due to stagnant wages and rising living costs, deeper issues remain unaddressed. Dhiraj Nim from ANZ Research noted that reaching an 8% growth rate demands serious changes in agricultural markets and better business conditions.
Since returning to power last July, Modi has pivoted toward groups that are politically significant. His administration has shifted agricultural trade policies to support farmers, provided cash transfers to women, and now, these tax cuts. However, this is not the first time his government has stepped back from broader economic reforms.
During previous terms, even when Modi’s Bharatiya Janata Party enjoyed a decisive victory, they hesitated to push needed reforms. According to Amit Ranjan from the Institute of South Asian Studies, during the 2019 election, the BJP secured over 300 seats, opening a window for reform. However, the government leaned more towards appeasing voters than implementing changes that might not provide immediate benefits.
In the past, Modi allowed an order to ease business land acquisitions to lapse when he couldn’t gain opposition support. Although new labor codes were passed in 2020, their implementation has been slow across different states. Goals for privatizing state-owned firms have also stalled, with the government opting to inject more cash into struggling enterprises instead.
The need for reforms has come not only from economists but also from within the government. India’s chief economic adviser, V. Anantha Nageswaran, highlighted the necessity for easing rules surrounding land and labor. He cautioned that sticking to the traditional way of doing things could lead to stagnation.
The tax cuts, costing around 1 trillion rupees ($11.56 billion), have limited the government’s capacity to boost infrastructure spending. The budget allocates 11.2 trillion rupees for capital expenditures in 2025-26. Despite this, actual spending has often lagged due to election-related delays.
Christian de Guzman from Moody’s Ratings believes that investment in capital projects and infrastructure offers a more sustainable boost to growth than tax measures. Since the COVID-19 pandemic, while capital expenditure has surged in hopes of igniting an investment-driven recovery, results are yet to manifest, with job growth and wages remaining weak.
After the budget announcement, shares in capital goods companies took a hit, reflecting market unease. The budget shows a tendency to support consumption through tax cuts rather than the public infrastructure projects emphasized in previous years. This shift considers challenges like budget constraints and the complex execution of public projects.
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Narendra Modi, economic reforms, tax cuts, India, budget announcement, spending habits, agricultural markets, the government, GDP growth, wage growth, earnings growth, economic stagnation, human capital
