For India budget, tightrope walk between creating jobs and gov’t deficit

Mumbai, India – Prema Salgaonkar begins cooking food for sale in her suburban Mumbai home hours before dawn. Her son, Amar returns from work only when the sun is well above and she is done making her nearly 100 vegetable-stuffed parathas.

Salgaonkar lost her nonprofit job almost a year ago, and Salgaonkar’s son, Amar, 35, lost his job selling data plans and mobile phones six months ago. He eventually began working as a temporary worker, working nights on transport trucks and negotiating with police and other officials, despite not having any stores hiring.

As Finance Minister Nirmala Sitharaman unveils the budget for March 1st, she will have to find a way to encourage growth and employment for the millions of people who are having trouble finding steady employment while adhering to the budget’s goals.

“We don’t sit at home”, Prema says, about how they ended in these temporary jobs. She quickly explains how vegetables’ prices have increased, leaving her with little to cover travel costs and money to save for Amar’s wedding, which, given that he doesn’t have a stable job, seems like a distant dream.

According to the most recent and slowest data in seven years, India’s gross domestic product (GDP) growth for the quarter ended in September 2024 decreased by 5.4 percent. The fiscal year ending March 31 is expected to experience a slowdown in growth, which is the slowest in four years. However, “there is no room for fiscal leniency”, or increasing government spending to kick-start growth, says Dhiraj Nim, an economist at ANZ Bank.

India’s fiscal deficit increased to 9.3 percent in the fiscal year that ended in March 2021 as a result of higher government spending during the pandemic. According to Sitharamanan, she wants to reduce it to 4.9 percent this year and to just 4.5 percent the following year.

According to economists, the economy has been hampered by weak consumer demand and low private company capital investments.

“Some economists, including me, have flagged that post-COVID demand was a problem”, says Sunil Sinha, professor of economics at the Institute for Development and Communications, Chandigarh.

Demand for goods and services recovered to pre-pandemic levels only in certain areas, such as from wealthy Indians, for international tourism, luxury cars and other premium products, Sinha says. But demand for mass-consumption products, such as soaps, shampoos and biscuits had remained low and fell further in the past quarter.

Amar, who worked in India’s booming mobile sales sector for nine years, found that, after the pandemic, selling mobile phones and data plans got harder, friends and colleagues got fired from their jobs and finding a new job has been tough.

‘ Limit ‘ to government spending

The government under the leadership of Prime Minister Narendra Modi has spent money on building bridges, highways, and other significant infrastructure projects to create employment and growth over the past ten years. Given the fiscal spending targets, however, it might no longer be possible.

“There is a limit to how much the government can spur growth”, says Nikhil Gupta, chief economist at Motilal Oswal Securities, a Mumbai-based securities firm. By anticipating that the government would significantly boost growth, we are burdening it too much.

Despite having their tax rates reduced in 2019 from 30% to 22 percent, India’s private sector investment in expanding capacity has remained low.

Sinha claims that the only way to increase corporate spending would be through the weak demand.

With the new US administration, this tightrope walk of encouraging demand without overspending has also become more difficult.

The government will continue to adhere to the [fiscal deficit] target, especially given the volatile capital flows brought on by policy changes in other countries, according to Rumki Majumdar, economist at Deloitte India.

Trump threat

When President Donald Trump took office in January, foreign investors sold shares worth more than $8 billion on Indian stock markets as the dollar strengthened and Trump pledged to support US businesses over outsourcing to other nations. India’s foreign currency reserves also fell in this period.

The Trump administration has threatened to impose tariffs on imported goods, and it is questioned whether highly skilled professionals need H-1B visas, which could have an impact on India’s technology sector.

“The Trump camp has a pretty lively, visible discussion about skilled worker visas. So, it is too early to predict how this will play out”, says Rick Rossow, chair on India and emerging Asia economies at the Center for Strategic and International Studies (CSIS), a Washington, DC-based think tank.

Manufacturing could move to India as a result of Trump’s tariffs on Chinese goods, which has been an effort to encourage in the last few years of the Washington, DC, and Beijing trade war. However, New Delhi has had mixed success.

“India has benefited from India’s efforts to reduce its overreliance on Chinese manufacturing,” according to the United States. However, under Trump, India is expected to not expect the US government to continue promoting American businesses in these industries. India will need to win the investments based solely on domestic market conditions, requiring aggressive reforms at the]federal] and state levels”, Rossow said.

Sinha says many such bottlenecks for investors, including land acquisition, water and power supply are now in the hands of state governments, many of whom have dealt with high unemployment and weak consumer demand by offering election sops, such as cash handouts. This has most likely had a negative impact on state-funded deficits.

Salgaonkar, for instance, says she has benefitted from a Maharashtra government scheme which gives cash handouts of 1, 500 rupees ($17) a month to women. She has found relief in balancing a tight budget in her home.

But Motilal Oswal’s Gupta says “We have to ask, are these schemes necessary? What foundations are used to create these schemes? Are they merely used as political propaganda? Structurally speaking, we don’t like these and there is a limit to how much they can spur growth”.

Need for a plan

If state governments spend on capital expenditure, such as smaller-scale roadbuilding, it could lead to employment more so than the union government’s large infrastructure projects that are increasingly mechanised, says Sinha.

The government needs to also improve access to labour, land, capital to boost production which in turn will help create jobs, says Deloitte’s Majumdar.

India’s growing construction sector, which is also its second-largest employer after agriculture, could also get a boost in the budget, says Motilal Oswal’s Gupta.

Although there has been some discussion about whether income tax rates could be reduced, economists don’t entirely agree that this could cause India’s lower middle class to demand more.

Sitharaman claimed that the economy’s slowdown is “not systemic,” despite the fact that sluggish demand has become a growing issue. The slowdown in public investment in the last quarter was caused by India’s election commission’s ban on spending during the time of the election, she claimed. In the upcoming quarter, Sitharaman anticipates a recovery in growth.

Salgaonkar has her own prescription for Sitharaman: lower prices, increase buying capacity by creating jobs, or both.

Salgaonkar discusses rising costs for clothing, cooking gas, and other essential items while incomes in her home have decreased, while inflation increased to 6.2 percent in October, surpassing the central bank’s target of 4%.

Source: Aljazeera