All dressed up and nowhere to go? Nirmala Sitharaman will nod her head at that.
After more than half a decade of reforms, the finance minister will still be desperately applying a fresh coat of make-up to make the Indian economy party-ready when she presents the Union Budget on February 1. And therein lies a tale of how critical this juncture is in the Indian economy’s coming-of-age story.
India’s GDP growth rate in the first part of this year was above 8 per cent, with the financial system remaining robust, and consumption, manufacturing, and exports showing some spurts. Yet, Sitharaman is in that unenviable position of waiting to see if the footwear will fit.
"India enters Budget 2026 with robust macro fundamentals, with the GDP projected to grow around 7.4 per cent. Yet the translation of growth into jobs and real household income remains uneven across states and regions," said Vishwanathan Iyer, senior associate professor at Great Lakes Institute of Management, Chennai.
It really shouldn’t have been this way. The government had unleashed a series of reforms over the past few years in its gallop towards a $5 trillion economy—and the subsequent goalpost of 'Viksit Bharat' by 2047—such as corporate tax cuts in 2019, production-linked incentives (PLI) to attract investment in crucial manufacturing sectors, structural reforms during the pandemic, and a mega capital expenditure on infrastructure in the following years. The income tax cuts and GST rationalisations last year, intended to speed up consumer spending, rounded off this supposed Ashwamedha.
But the animal spirits have been a bit on the subdued side.
"Corporate profits as a share of GDP have risen, but real wage growth has not kept pace, especially outside formal sectors," said Iyer. "Private consumption, which accounts for nearly 60 per cent of GDP, has lagged output, reflecting weak income transmission at the household level. In labour-surplus states, a large informal workforce with low productivity further dampens consumption demand."
This should not have been the case. "There have been a bunch of structural reforms that should have ideally had the economy booming by this time," said Ashi Anand, CEO & founder of IME Capital, an investment firm. "But you aren't really seeing that, with the exception of a few segments. Apart from that, consumption is still very weak."
Two whammies in the recent past, neither of which was in the control of the Modi government, threaten to be spoilers of its efforts. First, the tariff war President Donald Trump unleashed on the world; the tremors of which hitting India the hardest. Even China, which many had thought was America’s primary target, has reached a sort of understanding, while India has been the Cinderella left waiting for the glass slipper of a trade deal to fit.
The tariffs (upwards of 50 per cent) have made Indian merchandise exports to the US pretty much unviable. And let’s not even go into the ‘Sanctioning Russia Bill’ pending with US lawmakers, which will put those importing from Russia at risk of 500 per cent tariffs. Or, God forbid, Trump starts targeting India’s golden geese—services, pharmaceuticals, and electronics—which have been exempt from tariffs so far.
While there is hope of a trade deal being worked out, the worry is that the further it is delayed, the worse the prospects for Indian exporters. Business once lost and replaced by others is difficult to win back. The bigger, long-term worry for the economy is that for all the incentives and sops, India’s hopes of being a manufacturing base for global biggies will take a beating if goods produced in the country are tariffed at an unfavourable rate in the US, the world’s largest consumer market.
The second factor is the fear of being left out of the AI party. No, we are not talking about jobs or skilling, but the global sweepstakes that AI and deep tech have become on the investment side—a reason India seems to have lost out on the investment spree in the past year or so.
"India is really not positioned to benefit from the AI value chain from the investment perspective, with up to $1 trillion being invested in this space every year," said Anand. "That is also the reason why the deluge of foreign investment coming into India that the country saw in the post-Covid years has now virtually trickled to a halt, while countries ahead in AI technology, like South Korea and Taiwan, have outperformed in foreign investment."
There is a bigger concern. As AI evolves, its biggest impact will be on making services more productive. That is to say, for example, one programmer will be able to do the work of ten. For India, with its predominant strength in services and its demographic dividend of having the world’s biggest set of work-ready young people, this is not good news.
So what answers can Sitharaman come up with?
S. Ravi, economist and former chairman of the Bombay Stock Exchange, is emphatic on what the government can do: better and easier credit for small businesses, reserving smaller government tenders for Indian MSMEs, and further TDS reduction and GST rationalisation. "Look at sustenance in mitigating the global risk. That will be the first step," he said. And if these have all been tried before, Ravi has an addendum: "Implementation has not been effective. There is still work to be done."
The room for manoeuvring is not that limited when it comes to external factors like Trump’s tariffs or the AI wave. Experts THE WEEK talked to say there is an opportunity in the crisis, whereby the government can go in for a complete cleansing of the bureaucratic complexity India’s customs duty structure is mired in.
"The only thing that is within our control is improving the business climate and environment within India. Luckily, it appears that the Indian government is also aware of it," said Rahul Ahluwalia, CEO and founder of the policy think-tank Foundation for Economic Development (FED), and formerly with NITI Aayog. "We need to really double down and commit to big reform, bite the bullet on things that might even seem radical, like dropping all tariffs down to a low rate. Signal that you will stick to that for a long time."
A start was made in the last Budget, even before Trump went on the rampage, and it will be interesting to watch how much further down the reform road Sitharaman dares to venture this time. There is an escape route in arguing that an EU trade deal is ready and that the US one will be too, soon—so it might just be easier to offer another relief package for exporters and be done with it. Will she take the road less travelled?
While it is a given that the government will continue its heavy investment in areas like defence, it will be crucial to see how Sitharaman progresses with catalysing job growth. It will have to be two-pronged: ensure there is enough investment into research and development in AI and other deep tech to make India an innovative hub, and simultaneously push for private investment in job-intensive manufacturing.
There is an added urgency to this. India’s demographic dividend will soon turn into a burden, with population growth dropping below replacement levels three years ago. This means the workforce is at a peak right now, and providing them with productive jobs that add to national wealth is imperative.
"The world is on the brink of a technological upgrade, with AI and robotics. For India to succeed in this ever-changing dynamic world, innovation is a must," said Kirti Sharma, associate professor at Great Lakes, Gurgaon. "Reviving private investment would also make us more innovation-driven."
"It's a do-or-die kind of moment for India right now," said Ahluwalia. Modi and Sitharaman know it only too well. The question is, will they tailor this Budget to ensure India gets a seat at the high table?