Failing to make use of demographic dividend, the threat of walking into middle-income trap looms
The Modi government has failed to get the economy to fulfil its potential. This budget continues this disappointing pattern
The headline item on which the finance minister wants us (and Delhi’s voters) to focus is the income tax break. The government had long delayed this relief to taxpayers. Economic mismanagement over the last decade has stressed household budgets. In 2023, private consumption fell to a 20-year low while household savings were at a 47-year low.
So, will the income tax cut boost private consumption? Hardly so, since the taxpaying middle class constitutes a small fraction of Indians. If the aim was to provide a broad boost to private consumption, increase demand, and tackle rising prices, it would have made more sense to cut taxes and cesses on petroleum, which burden the common person and farmer alike.
Income taxes contribute more than corporate taxes today. In 2019, corporates received a massive tax break costing the exchequer ₹1.45 lakh crore. The revenue foregone due to the income tax cut is estimated at ₹1 lakh crore. The corporate tax cut has not spurred the private sector to step up investment. Instead of investing in India, thousands of high-net-worth individuals are fleeing abroad. Hence, the Economic Survey’s advice to the government is to “get out of the way” and bridge the trust deficit.
Half of our workforce is employed in agriculture. This budget has no provision that will raise their incomes. The chimera of doubling farmer incomes has been conveniently forgotten. MSP for crops has increased only marginally to account for rising inflation. It is, therefore, no surprise that real wage growth amongst agricultural labourers has been less than 1% over the last decade. Agricultural growth fell to 1.4% in 2023-24 and is estimated to be only 3.8% in 2024-25.
The rising demand for MGNREGA work is the direct result of a lack of gainful income opportunities in the rural economy. As of January 2025, there were over 93 million active workers. Yet, the MGNREGA budget for 2025-26 remains unchanged. Allocation for PM Kisan remains stagnant while urea and nutrient-based subsidies have been marginally reduced. These measures directly impact the income of cultivators and farm labourers. Additionally, as farmers spend more on fertilisers and urea, they defer investments in agricultural equipment like tractors, and harvesters.
The expectation that private consumption will drive growth must account for the distress in rural India and among different groups that have seen their incomes shrink. In 2023, families’ net financial savings fell to 5.3% of the GDP, a 47-year low.
For all its tall talk, the government is not serious about economic reforms. Last year, it deployed the budget to appease NDA allies in Andhra Pradesh and Bihar. As Bihar goes to polls this year, the finance minister has turned the Union Budget into a poll promises pamphlet. Listing out small projects fools no one. During the 2015 election campaign in Bihar, PM Modi promised a ₹1.25 lakh crore package to Bihar. The FM’s announcements are a fraction of what Modi promised Bihar then.
Lack of clarity in policymaking impacts India’s manufacturing capabilities. Post Covid-19, multinational companies sought to de-risk their dependency on Chinese manufacturing. This was a historic opportunity for India to capture a lion’s share of the market. However, the weakened manufacturing sector and the government’s regulatory complexities meant that India failed to capitalise in time.
India also needs to diversify away from sole source dependency on China for many products and to produce them domestically. But production-linked incentives have been less strategic and insufficient to attract investments. They have merely transformed Make in India into Assemble in India. Even the reduction in basic customs duties may have the effect of increasing imports from China and hurting small and medium enterprises.
President Trump’s election poses serious challenges to globalisation, from which India has benefited substantially, especially on the services front. His tantrum threatening BRICS’ (illusory?) efforts to move away from the dollar highlight how India must move ahead with caution. We are clearly entering a VUCA (volatility, uncertainty, complexity and ambiguity) world. Technological developments such as Artificial Intelligence (AI) have the potential to radically change the future of work and the future of war. Unfortunately, there is nothing significant in the Union Budget which prepares India sufficiently for such an unprecedented future.
The Economic Survey states that India needs to grow at 8% in a sustained manner over decades to reach Viksit Bharat by 2047. But the survey also shows that over the last decade, growth has been stuck in the 6% range. Clearly, the Modi government has failed to get the economy to fulfil its potential. This budget continues this disappointing pattern. PM Modi is marching India into a middle-income trap which will deprive us of our deserved demographic dividend.
MV Rajeev Gowda is chairperson,and Akash Satyawali is joint secretary,AICC Research Department.The views expressed are personal