Budget 2025: Boost Consumption To Stimulate Growth 

The government primarily requires money to spend on social infrastructure (like schools, hospitals, water, sanitation, etc.), physical infrastructure (like railways, roads, airports, etc.) and transferring funds to the poor and the deprived, so that distribution of income becomes more equal.

But how does one say whether a Budget is good or bad? The general assumptions underlying a good budget are: It controls fiscal deficit, carries on with necessary reforms, and give incentives to consumers and business.

For the benefit of the reader, there are five components of demand, namely consumption expenditure, investment expenditure, government expenditure, exports and imports. The most important component of demand is consumption expenditure, covering around 57 per cent of the national income.

Generating and sustaining income would therefore call for strategies that would generate income and sustain consumption.

Until the middle of 2024, the Indian economic outlook looked quite optimistic, with predictions of continued growth at a rate of over 7 per cent. However, when India posted a lower GDP growth rate — 5.4 per cent in the second quarter of 2024 — it quickly turned pessimistic. According to the government's own estimate, over the year, GDP growth is expected to hit a four-year low at 6.4 per cent.

Other metrics of economic growth are also disappointing, with declining urban and rural consumption, single-digit growth in GST collections (7.3 per cent YoY in December 2024), and core infrastructure growth (4.3 per cent YoY increase during November 2024).

There has been a fall in car, two-wheeler and cement production. In fact, the PMI (Purchasing Managers’ Index) — which tracks sales, employment, inventories, and price data of manufacturing sector companies — has shown a sharp decline to 56.4, the lowest in 12 months. 

Therefore, the expectation from the Finance Minister is to introduce policy measures aimed at boosting consumption, like increasing tax exemptions and creating a favourable business environment by reducing the cost of doing business, for example, through increased fund allocation for physical infrastructure like roads, ports and public utilities. These measures would foster job creation, which in turn would sustain demand.

As the middle class (with an annual income between Rs 5-30 lakh) form the backbone of the Indian growth story, there is a need to nurture the consumption pattern of this group. Much of the GDP growth that occurred among emerging Asian economies during the second half of the last century was through increased labour force participation.

These countries — including China, South Korea, Singapore, Taiwan and Vietnam — were able to absorb labour from the low-productive agricultural sector to the high-productive manufacturing sectors. Much of the supply of white goods in the world, like mobile phones, air conditioners, refrigerators and computers, is manufactured in these countries, helping their economies transition from low to middle and high-income levels.

It is not surprising to see why there is a flourishing middle-class in these economies — their manufacturing sectors were able to absorb labour from agriculture. According to pewresearch.org, the share of Chinese who are in middle-income group jumped from 3 per cent to 18 per cent. However, the share of India's middle-income group remained unchanged during most of this century.

Although, thanks to reforms and the consequential high growth rates in GDP, India was able to reduce poverty — from 40 per cent in 2004 to less than 10 per cent in 2023 — the drop in poverty merely resulted in an increase in the number of low-income population. This also explains a reason for consumption expenditure not increasing.

Between 2016 and 2023, people in the bottom 20 quintiles has seen their income growth decline by 20 per cent, whereas those in the top 20 quintiles has seen their income grow by 20 per cent. The growth in income for this top 20 quintiles is because of highly skilled new-age workforce (often foreign-returned) like doctors, legal experts, engineers and MBAs working for the global consultancy firms and global capability centres of MNCs based in India.

On the other hand, a growing economy is also witnessing the creation of low-paid and low-productive jobs like housekeeping, security services and other gig type jobs such as Zomato delivery boys, which in a way is contributing to widening income inequality.

A reason for an unequal income distribution is that most of our labourers are stuck in low-productive sectors. According to the Periodic Labour Force Survey (PLFS) 2021-22, agriculture still remains the largest source of employment, employing 45.5 per cent of the workforce. Construction is at a distant second employing 12.4 per cent, closely followed by trade, hotel and restaurant, employing 12.1 per cent of the workforce.

Now all these sectors require low/semi-skilled labourers, with low productivity. India’s labour productivity — economic output per hour of work — is just 12 per cent of the US levels. In purchasing parity terms, GDP per hour worked is US$ 81,800 for the US, in comparison to India’s US$ 10,400. This also explains lower per-capita income.

Additionally, the rising costs of healthcare and education are resulting in lower disposable incomes. Even for the tertiary sector, and if one is lucky to get covered under government insurance coverage, new medicines for terminal illness diseases and surgical procedures, remains outside the budget of a majority of the Indian household.

For example, each round of chemotherapy and radiation costs more than one lakh, whereas a vital organ transplant (liver and kidney) can cost anywhere between Rs 20-30 lakh.

The same applies to the cost of quality education. At a time when public spending (Central and state governments taken together) is only 4.5 per cent of the GDP, it is not surprising that for a majority of the population, education is delivered by the private sector.

Because of the failures of government schools to provide a decent education, studies show even the poor income household prefers sending their kids to private schools.

However, sending kids to private schools cost money. Educating a child between the age of 3-17 years costs around Rs 30 lakh; a four-year B.Tech or a three-year B.Sc costs around Rs 4-20 lakh; and a five-and-a-half year MBBS degree can cost up to Rs 1 crore.

A higher allocation of funds towards education and healthcare is essential, alongside improvements in the delivery mechanisms of these two critical services.

As long-term data suggests, countries like China, South Korea, Singapore and Thailand were able to grow their per-capita income by investing in quality primary education and healthcare systems — an approach that can be replicated through sustained, increased budgetary allocation.

(The writer is professor, Mahindra University, Hyderabad. Views are personal)