Roads that fork with Budget 2025

In the next two years, we’ll know the outcomes of the census, and the finance and pay commissions. This budget is a chance to address some issues before the imperatives change
Roads that fork with Budget 2025
Illustration: Mandar Pardikar
Updated on
4 min read

The fact that the Indian economy is on the verge of turbulence is well known to all but those who choose to wear blinkers. But if we take the blinkers off, we would be able to see a number of occasions coming up in the near future that would allow the administration to navigate the storm better.

One immediate fallout of the pandemic was suppressed demand. It resulted in a delusional base effect in the following years, giving us GDP growth rates as high as 7 percent in 2022-23 and 8.2 percent in 2023-24. The rate slumped to 5.4 percent in the second quarter of 2024-25, and the rate for the whole financial year is now expected to be a little over 6 percent. To achieve the dream of a developed nation by 2047, India needs a sustained growth of 8 percent.

Hitherto, the government's policies have been more corporate-friendly, with some sops for the very poor. Even during the pandemic, when many other countries were designing stimulus packages to promote employment and sustain demand, our finance minister chose to sharply bring down corporate taxes at the cost of Rs 1.5 lakh crore. The FM obviously believes growth can only trickle down from above. But economic inequalities have grown enormously, the middle class has been squeezed, and, as a consequence, demand has plummeted.

The consumer goods sector showed a 4 percent decline in profit year on year in 2024, and revenue growth was minimal. The automobile sector, a barometer of middle-class prosperity, has mostly shrunk. Geopolitical tensions have hit exports. Inflation, particularly food inflation, has been high, preventing monetary policy intervention to spur demand. As Shaktikanta Das, the former RBI governor, plainly put it, "High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real GDP growth."

At the same time, the rupee is under enormous pressure and has been held up by the RBI, which has drawn down its foreign exchange reserves. Slowing credit growth and inadequate salary increments, together with high unemployment, have further suppressed demand. The stock market has read the writing on the wall, and the Sensex has fallen nearly 10,000 points from last year’s high. As the middle classes have been investing heavily in mutual funds, the market movements cam further weaken consumption.

India faced a similar downturn just before the pandemic. According to the National Sample Survey, average consumption expenditure fell from Rs 1,587 per person in 2014 to Rs 1,524 in 2017-18 in the rural areas and from Rs 2,926 to Rs 2,909 in urban areas. The pandemic took the focus away from the economy, and the limitations of our economic policy were not exposed. There is no pandemic in prospect now, and the government will have to find answers willy-nilly.

Today’s budget provides such an opportunity. Hopefully, the FM will have realised that exclusive supply-side policies do not help. However much one urges private companies, they cannot be induced to invest if they are not confident that what they produce will be sold. Fiscal action is required, as a reduction in interest rates on the monetary side can result in the flight of more foreign capital, weakening the rupee even more. To deal with the situation, the FM will have to find ways to strengthen both rural and urban consumption, and use public investment to support troubled industrial sectors through government purchases and investment.

The budget can provide the immediate stimulus. But we also have a new central pay commission on the anvil. The recovery after the 2008-09 recession was facilitated to a great extent by the 8th Pay Commission’s conscious decision to strengthen domestic demand with a more liberal outlook.

The pay commission can signal the private sector to be more liberal with salary increases, which will further stimulate demand. In December, the chief economic advisor pointed out the anomaly of the corporate sector amassing the highest level of profit in the past 15 years in 2023-24, while lagging in salary increases.

The pay commission can also be an instrument for massive administrative overhaul by introducing an element of outcome-oriented variable pay in government salaries. The present administrative system is still based on archaic procedures, many of which were inherited from colonial times. It is possible to design outcome-oriented procedures as shown by the UK, Australia and New Zealand, among others.

We, too, started with a Result Framework Document system a decade ago, but it fell apart before it matured due to a lack of political ownership by both the UPA and NDA governments. Resurrecting outcome orientation in administration with supporting budgetary measures can bring about wholesale change in governance.

We also have another instrument in hand: the 16th Finance Commission. This, too, has the opportunity to bring about tangible change. While the previous two FCs gave more than 40 percent of allocable surpluses of central revenues to the states, the Centre has found devices to reduce the states’ share to less than 30 percent. In a large and diverse country like India, requirements vary by states, and a federal polity must give each state room to grow the way it must, given the prevailing conditions.

The horizontal devolution of resources between states has been based primarily on per-capita income, area and population, with the result that the bulk of resources has gone to a limited number of states that have not used them wisely. It would be good if the present FC accepted the fact that growth is not the same as a rise in per capita incomes or GDP. As Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi said in 2009, "A gulf of incomprehension between the expert certain in his knowledge and the citizen whose experience of life is completely out of sync with the story told by the data… Nothing is more destructive of democracy [than when] people believe they are being lied to." Such a situation is developing in India. The FC could take a different look at growth in terms of human quality indices and work out entirely new ways of devolution to states.

In 2026, there will be political problems to handle as the delimitation of parliamentary constituencies looms larger. If the economic crisis is also unaddressed by that time, the country could be in deep trouble.

(Views are personal)

(kmchandrasekhar@gmail.com)

K M Chandrasekhar | Former Cabinet Secretary and author of As Good as My Word: A Memoir

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