Sanjaya Baru | Budget 2025: Taking India’s economy from good to great

The annual Budget speech of the Narendra Modi government has stuck to a pattern over the years. Half the speech is devoted to making claims about all the good work done and the other half to what is proposed to be done. There is very little focus on the actual stuff of an annual fiscal statement to Parliament, on why revenue estimates have departed from Budget estimates and on the implications of various proposals on the expenditure side and the revenue side.

The real scrutiny of the Budget is left to analysts who spend the next few days analysing Budget proposals. In any case, few are interested in anything more than what the tax proposals mean for their home budgets. All the grand plans and proposals are for party spokespersons to sell on prime time. With the introduction of the Goods and Services Tax, the annual Budget speech has been robbed of some of its usual excitement since there was a time when everyone waited to figure out how much more soap or cigarettes would cost.

While there has been little dramatic action on the direct taxes side during the tenure of finance minister Nirmala Sitharaman, following the changes made by former finance minister Arun Jaitley, there is some expectation this year that some headline grabbing changes may be made. Middle class salary earners expect some direct tax relief and there is talk of imposing some burden on the super-rich and the wealthy.

Speculation about the latter has been triggered by ministers and officials adding their voice to that of many analysts who have been concerned about the growing income gap between the rich and the middle class and its impact on consumer behaviour. The decline in sales of consumer durables and non-durables and the consequent slowdown in national income growth rate in the first half of fiscal 2024-25 has rung alarm bells in boardrooms and government offices.

National accounts data for the past decade reveal that total private final consumption expenditure, a fairly good proxy for income, grew by an average annual rate of growth of 6.0 per cent during 2013-2023. However, households spending on education (7.5%) and healthcare (8.2%) has risen at a faster rate pace than spending on consumer goods, food and fuel. Clearly, the increasing private provisioning of both health and education has become a pain point for middle class families. With employment growth lagging, many middle-class income earners are having to spend more on the maintenance of both unemployed youth and the retired elderly within their homes.

In her July interim Budget speech, the finance minister listed what she termed as “next generation reforms”. Most of these, like improving land records, establishing a land registry, mapping land ownership and digitising cadastral maps are mainly under the purview of state governments. Apart from a reference to climate finance and the rupee, there was little focus on what the Centre can do. There is much, much more the Union government can do to improve the “ease of doing business”.

Without this effort. private investment will not respond in the manner Ms Sitharaman had hoped it would.

Despite all this, expect Ms Sitharaman to begin her speech painting a glorious picture of how India is well on its way to becoming “Viksit Bharat” in “Amrit Kaal”. Much will be said about the fact that at 6.5 per cent growth, the Indian economy is among the faster growing economies of the world and is on the verge of becoming the world’s third largest economy, after the United States and China. The logic of sustained growth over the past quarter century will of course ensure this but the major concern today is about the quality of that growth process and what it means for the middle class and the poor.

Even about the growth numbers, there is an issue. It is now widely acknowledged, within the Union government, among research institutions and in multilateral financial institutions like the World Bank and the International Monetary Fund that India’s medium term growth rate is likely to be about 6.5 per cent. The optimists hope it would be 7.0 per cent, the critics and pessimists do not see it crossing 6.0 per cent. That is the state of the numbers debate today. How should one view this?

Consider the fact that after recording an annual average growth rate of 5.5 per cent in the two decades of 1980 to 2000, the Indian economy notched up an average of 7.5 per cent during 2000-2012, with annual growth hitting a high of over 8.0 per cent in 2003-2009.

I recall the industrialist Mukesh Ambani making a presentation to Prime Minister Atal Behari Vajpayee sometime around 2000 in which he showed how the economy could aspire for and hit an annual growth rate of 10 per cent. That kind of optimism no longer exists.

In its report to the government submitted around the same time in 2000, the then National Security Advisory Board stated that the economy would have to sustain 7.0 to 8.0 per cent growth for it to be able to raise adequate income and fiscal resources to eliminate poverty, generate employment, provide for public investment in health, education, research and defence. I would imagine this would be true even today.

So, the challenge for the Union government is to bridge this gap between the widely expected medium term growth rate of 6.0 to 6.5 per cent and the reasonably required one of 7.0 to 8.0 per cent. How does Ms Sitharaman propose to add that additional one percentage point growth with her budgetary and fiscal proposals this coming year?

Rather than become breathless and thirsty with a long speech full of glory and thunder, we hope the finance minister will show us her planned way forward from a good to a great performance.