Union Budget 2025: Make ‘Middle India’ great again

Pankaj Munjal, chairman and managing director of Hero Motors Company reminisces about a visit to Varanasi. “I saw a street lamp with a broken bulb. I went back a few years later, I saw the same bulb, same colour, (still) broken!” He said, “For the man under that street lamp, things haven’t changed one bit.”

Munjal adds, “Today, when I go to America and Germany as businessmen, we raise our heads high, because our government has done a great job with growth,” he said, but then adds, “But economic prosperity has not trickled down as much. The growth is only in the top 100 million people. Prosperity has not gone down to the bottom billion people.”

Whether the glass is half full or half empty today depends on which side of the K-shaped divide you are on. And that is a conundrum that is staring Nirmala Sitharaman smack in the face as she puts finishing touches to Budget 2025, scheduled to be tabled in Parliament on February 1.

Will economics spoil the political ‘party’?

Which way will the Modi government swing this time? Continue with the recent years’ trend of more capital expenditure and hoping that it will trickle down and increase public spending, which has been on the low for the past few years? Or, go in for some pruning of expenses, including on the spiking subsidies and revdis, which has now virtually enshrined itself as a basic tenet of electioneering?

The Prime Minister and his FM are on a stronger wicket this time around, politically at least, compared to the coalition compulsion which forced some deviations as concession to coalition supporters in the July budget after the Lok Sabha elections. Since then, BJP’s wounded ego has been soothened by winning Haryana against seeming odds, as well as a landslide sweep of Maharashtra, India’s richest and most industrialised state. And with no major hustings until Bihar this year-end, the party will hope against hope to do a repeat in next fortnight’s Delhi polls, as well.

But come to the economy, it’s a different story. The post-pandemic economic reconfiguration spurred the new economy to new highs and a boom in premiumisation, be it SUVs or luxury housing or luxury products and experiences that the ‘haves’ could not have enough of. It was then easier to brush under the carpet the distress in the rural side of the country and the drop in spending in the mass market category, by attributing it all to post-pandemic impact and how we have to wait for the ‘virtuous cycle’.

But all blinkers came off when the GDP figure for the July-September 2024 quarter came out at a shockingly low 5.4 per cent—even if, technically, the growth rate had already been continually shrinking throughout the year. This soon led to downward revision of annual GDP growth rates to around 6.4 per cent, which, if it comes true, will make it the lowest growth in four years.

While the Finance Ministry put up a brave face and blamed it all on the drop in government spending during the long-drawn-out election period and the cyclicality of economics (not to forget, global uncertainty),it didn’t have many takers. It also expressed confidence that once food inflation was under control, consumption will pick up.

Ironically, the alarm is palpable with even India Inc, which is normally all about pushing for higher government spending and incentives for businesses. But industry itself is now ringing the alarm bell when it comes to employment and consumption.

Glass half empty

Jobs have a direct correlation to the economy—when people earn money, they spend, fuelling consumption, which in turn,  leads to economic growth. Not surprising that business tycoons like Uday Narang, founder of Omega Seiko Mobility, a leading electric mobility player is emphatic about fuelling consumption.

“We want the lower end of the public to be able to get better purchasing power. That hasn't happened in the last two-three years,” he says.

Business body CII in its agenda for the budget cited mass scale employment generation as the most crucial. Chandrajit Banerjee, Director General, CII, says, “India’s demographic dividend presents a tremendous opportunity to propel economic growth and social transformation. Employment generation is a critical pillar in this journey.”

Sitharaman’s last budget did include employment-linked incentives (ELIs) aimed at generating private sector jobs, upskilling and sops to firms who take in interns. However, its implementation has been delayed and even the internship scheme did not become the active tool many had hoped it would turn out to be.

The question is, what can she do now differently?

K-pop, and K-‘flop’

“India’s employment trajectory is a bit tragic,” says Subhash Chandra Garg, former union finance secretary and author of the book ‘The $10 Trillion Dream’ as well as ‘The $10 Trillion Dream Dented’, “There is no increase in employment in agriculture of the matured industrial sector, the ‘old’ economy’, like food, textiles, footwear etc. While the growth is flat, there is mechanisation also happening, which is actually reducing the number of workers there.”

“But areas where employment is increasing include the new digital economy (and larger IT sector) as well as the bigger investment in the manufacturing for this digital economy as well as infra creation for energy transition. But then the employment is essentially for highly or relatively much better skilled people. And in the digital economy, you employ less number of people (compared to) what you were doing earlier in agriculture or textile.”

This has led to a K-shaped divergence even amongst workers and income—highly skilled people, like C-suite, professionals those in digital banking, e-commerce etc make a lot of money.  “But bulk of the people have much less of a pie to share amongst themselves,” pointed out Garg.

And that has led to a very real, frightening possibility that the budget would need to take cognisance of.

Where have all the middle class gone?

“There is no real middle in India in terms of consumer class,” says Ishaan Parwanda, director of Trinity Touch, an electric tech company. “If you say we have 50 million people in India who are in the middle, compared to 1.4 billion total population, and you remove the retirees and the students from that, then it doesn't really leave many people.”

While policies in recent years have a direct bearing on this divide, it is now a cause for concern as the have-nots are not spending — and consumption accounts for more than half the domestic economy.

The government’s K-shaped strategy sounded simple—unleash the animal spirits of Indian industry by showering it with a bevy of sops, ranging from some of the lowest corporate tax rates in the world, production-linked incentives (PLI) schemes and multiple rounds of capital expenditure in infra projects like roads to railways (As Garg quips, “Capex, by the nature of it, eventually ends up with corporates who are offering those construction and other services on which it is spent!”).

And meanwhile, handhold the masses in distress with multiple schemes like free wheat or rice, subsidies for fertilisers and gas cylinders and of course, a plethora of freebies, waiting for the trickle down effect to increase prosperity in the hinterland.

That has simply not happened.

While big businesses reported record profits over the past couple of years thanks to the government flushing the system with cash, they have not been in any rush with regards to concurrent investment in new projects or capacity expansion.

Their argument? Lack of consumer spending. And the reason for lack of spending? Not enough jobs or employment. And the reason for not enough jobs? Lack of capital investment by the private sector. And the reason for lack of investment by the private sector? Lack of consumer spending.

The not-so-virtuous cycle seems to have become the new reality. Can Sitharaman break the wheel?

Vexing Taxing

An easy way, one would think, is to put more money in the hands of the people, either through direct transfer or as tax cuts.

But for the latter, Sitharaman’s hands may be tied. Political and coalition government reality means sops and subsidies are only likely to go up, and the government will need even more tax to pay for it. But the direct tax base still remains minuscule, with barely three crore citizens out of 140 crore paying direct taxes.

The stick and not the carrot may just be the direction Sitharaman might head to, helped by increased digitisation in payments. As Rumki Majumdar, economist and director at Deloitte India pointed out, "The government will try to first plug the loop holes to ensure that we collect more taxes in the personal income segment because there are a lot of people who are probably having TDS but not filing returns.”

Middle India, dwindling or not, is already seething in anger at the compounding taxes they pay and the complexities and contradictions of GST. While some rejig of the tax regimes cannot be ruled out, it may simply be too little for most.

“You can't be a country where you are taxed equivalent to global level, but your income is one-tenth. That's a little unfair,” argues Parwanda of Trinity Touch. Adds Yogeshwar Sharma, senior vice president of Ralson Tyres. “(Govt) is using the taxpayers' money for giving sops to a certain segment of society. And we are paying the price without getting any extra benefit.”

Glass half full

There is still room for optimism—that the trickle down could still happen, that large-scale employment could kick-start, which in turn could see consumption going up as more people earn steady incomes. A PricewaterhouseCoopers study released at the WEF in Davos this week say 68 per cent of India’s CEOs are likely to hire in the next 12 months. Another report said the top six IT companies in the country alone plan to recruit 82,000 freshers in the coming financial year.

“The last year was full of uncertainties, from Indian and US elections to global crises. But now there is no delay,” Majumdar of Deloitte offers the best-case scenario. “Private capex will build up over time and capacity utilisation is already one of the highest. And of course, government capex will continue, so they will crowd in…and ensure investment picks up.” Sitharaman had better have some novel provisions in her upcoming budget to make this all a reality.