Guest Column| Budget offers opportunity to arrest growth deceleration
Poor performance in the manufacturing, mining, major service sectors and sluggish investment have been the main factors responsible for the deceleration. India cannot afford a deceleration in growth rate as it would cast a shadow on the dream of becoming a developed economy by 2047.
India aspires to be a developed country by 2047. According to NITI Aayog’s projection, India’s gross domestic product (GDP) will reach $30 trillion by that year, assuming an annual real GDP growth rate of over 9%. However, the economy’s rate of growth is pegged significantly low at 6.4% in 2024-25 as compared to 8.2% in 2023-24, which will be a four-year low. India cannot afford a deceleration in growth rate as it would cast a shadow on the dream of becoming a developed economy.
Poor performance in the manufacturing, mining, major service sectors and sluggish investment have been the main factors responsible for the deceleration.
The manufacturing sector is estimated to grow at 5.3% in 2024-25 as compared to 9.9% in 2023-24. The growth of the mining sector decelerated from 7.1% in 2023-24 to 2.9% in 2024-25. Construction and trade-related sectors witnessed a decline in the rate of growth from 9.9% to 8.6% and 6.4% to 5.8%, respectively. Other sectors that suffered were electricity, gas, water and utility services from 7.5% to 6.8% and financial services from 8.4% to 7.3%. The losing momentum of these sectors is worrisome and needs to be addressed as a priority in the Union Budget 2025-26.
Rural demand driving growth
The private final consumption expenditure, an indicator of consumer demand, is estimated to grow at 7.3% in 2024-25 as compared to 4% in 2023-24. However, the increase is mainly attributed to rural demand as agriculture and allied activities grew at a higher rate (3.86%) in 2024-25 vis-à-vis 2023-24 (1.4%). Rural demand constitutes 60% of the total demand. The urban demand is suffering due to deceleration in growth rates of sectors, such as manufacturing and services, unemployment, high-borrowing costs and stagnation or decline in real wages amid inflation, particularly food inflation. The demand for durables and fast-moving consumer goods is either picking up slowly or declining.
The automobile industry has been hit hard due to subdued consumer sentiment. The sale of cars slowed down to 5% in 2024, the lowest in four years. Normally, in December the sales pick up due to attractive promotions to clear stocks. In December 2024, however, car sales dropped by 8.6% as compared to November 2024. The story of two-wheelers’ sale was also not encouraging. The automobile industry is the backbone of the manufacturing sector. It contributes more than 40% to the GDP of the manufacturing sector and offers employment to 35 million people.
Keynesian principles hold key
Policies suggested by noted economist JM Keynes can be helpful to Union finance minister (FM) Nirmala Sitharaman for arresting the downward trend in the economy. Economic history shows that lack of effective demand was the major cause of the Great Depression (1929-34). Keynes suggested that governments through tax cuts and aggressive spending, including deficit spending, should create purchasing power to clear the glut of goods in the market. He suggested enhancing public investment to induce private investment. These policies proved to be a panacea to cure the ill-effects of the Depression. However, the Keynesian prescriptions lost their sheen in the 1970s in the wake of the oil crisis, inefficiencies of the government sector and growing clout of free market economy, spearheaded by Milton Friedman, a Nobel laureate.
Gradually, the policies of liberalisation, privatisation and globalisation became household terms, including in India. This resulted in glaring income inequalities across the globe. The widening gap between the rich and the poor results in deficiency in demand as the rich have lower propensity to consume as compared to the poor.
The Keynesian principles, in spite of setbacks, have been used across the globe as and when economies suffered due to decline in investment and demand. For example, during the financial crisis of 2008, and the Covid and post-Covid periods, countries used fiscal stimulus to rejuvenate investment and demand for reviving ailing economies. Our FM can also tap into Keynesian wisdom along with other policies to boost investment and demand.
Firstly, for boosting private investment, the FM should enhance capital expenditure (capex) in the 2025-26 budget. In the 2024-25 budget, the capex target was ₹11.1 trillion. The achievement is, however, likely to fall short of Rs.1-1.5 trillion as the government has utilised only 46.2% of the capex target from the April-November FY 25 as compared to 58.6 % in the corresponding period of FY24.
Progressive taxation
The FM should not only increase the capex but should also monitor meetings of capex target. Enhanced capex and achieving the target would induce private investment. Secondly, the FM may use the budget for moderating inequalities by transferring resources from the rich to the poor. Progressive taxation is an instrument she can use to heavily tax the rich and spend the mobilised resources on the poor and lower middle-income groups, particularly by generating employment avenues for them by giving stimulus to labour-intensive sectors. Thirdly, she should make a provision of more funds to the education sector for the generation of new skills aligned with the changing landscape of the job market. Empirical evidence suggests that investment in education reduces inequalities.
Fourthly, in case of the Mahatma Gandhi National Rural Employment Guarantee Act, she should enhance her entitlement of job days from 100 to 150 and increase the wages. Similar programmes should be announced for the urban poor for generating demand for wage goods. Fifthly, the FM by allocating more funds for rural infrastructure like roads, communication, irrigation and electricity can help in generating employment and boosting rural demand further. Sixthly, financial relief to the middle class can act as a strong instrument to stimulate demand. Finally, she should announce tax relief to the manufacturing, mining and service sectors that are bearing the brunt of the deceleration. ghumanbs54@gmail.com
The writer is former vice-chancellor, Punjabi University, Patiala. Views expressed are personal.
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