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

Mumbai, India – Prema Salgaonkar wakes up hours before dawn and begins to cook food in her suburban Mumbai home to sell. 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 job at a nonprofit nearly a year ago and her son Amar, 35, lost his job selling mobile phones and data plans six months ago. With no retailers hiring, he eventually took up temporary work, travelling nights on transport trucks, helping drivers negotiate with police and other officials.

This week as Finance Minister Nirmala Sitharaman presents the budget on March 1, she will have to find a way to spur growth and employment for the millions of people like the Salgaonkars, who are struggling to find steady work, while keeping to fiscal deficit targets.

“We don’t sit at home,” Prema says, about how they ended in these temporary jobs. She quickly lists how prices for vegetables have shot up, leaving her with little money to meet expenses and save up for Amar’s wedding, which now seems like a distant dream given that he doesn’t have a steady job.

India’s gross domestic product (GDP) growth fell to 5.4 percent for the quarter ending September 2024, the latest data available and the slowest in seven quarters. Growth is expected to slow to 6.4 percent for the fiscal year ending March 31, 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.

Increased government spending during the pandemic led to India’s fiscal deficit ballooning to 9.3 percent in the fiscal year ending March 2021. Sitharamanan has said she plans to bring it down to 4.9 percent this year and below 4.5 percent next year.

Economists say weak consumer demand and low capital investment by private companies have been a drag on the economy.

“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.

Gig workers wait in line to collect their delivery order outside a Mumbai mall [File: Francis Mascarenhas/Reuters]

‘Limit’ to government spending

In the last decade that it has been in power, the Prime Minister Narendra Modi-led government has spent funds on building highways, bridges and other large infrastructure projects to generate growth and employment. But that may no longer be possible given fiscal spending targets.

“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. “We are burdening the government too much by expecting it to boost growth a lot.”

India’s private sector investment in building capacity has remained low despite tax rates being reduced in 2019 to 22 percent from 30 percent for businesses.

Sinha says corporate spending would come only with the visibility of demand, which has remained weak.

This tightrope walk of encouraging demand without overspending has also gotten harder with the new administration in the United States.

“The government will stick to the [fiscal deficit] target as it would like to signal confidence that it has its expenses under control, especially when capital flows have been volatile due to policy changes around the world,” says Rumki Majumdar, economist at professional services firm Deloitte India.

Daily wage workers wait for employment in a market area in Kolkata [File: Rupak De Chowdhuri/Reuters]

Trump threat

Foreign investors sold shares worth more than $8bn in Indian stock markets this January when President Donald Trump took office, as the dollar strengthened and Trump promised to support US businesses over offshoring to other countries. India’s foreign currency reserves also fell in this period.

The Trump administration has threatened tariffs against imports and questioned the need for H-1B visas for highly skilled professionals, which could affect India’s technology sector.

“There is a pretty vibrant, visible debate in the Trump camp on 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.

Trump’s tariffs on Chinese products could lead to manufacturing moving to India, efforts that India has been trying to encourage in the last few years of the trade war between Washington, DC and Beijing. However, New Delhi has had mixed success.

“America’s push to reduce over-reliance on Chinese manufacturing has helped India land a few technology manufacturing investments in sectors like semiconductors and solar manufacturing. But there is an expectation that under Trump, India cannot expect the US government to continue encouraging American companies in these sectors to ‘friendshore’ to India. 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 likely affected state finance deficits adversely.

Prema Salgaonkar [Courtesy of Prema Salgaonkar]

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. It has helped her balance a precarious household budget.

But Motilal Oswal’s Gupta says “We have to ask, are these schemes necessary? What is the basis on which these schemes are designed? Are they just a political tool? 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.

While there has been some debate on whether there could be relief given on income tax rates, economists do not entirely agree that this could lead to increased demand from India’s lower middle class.

Although sluggish demand has been a growing problem in the economy, Sitharaman has said the slowdown is “not systemic”. Last quarter’s slowdown came due to a slowing in public investment in an election year, during which governments are barred from spending to influence election outcomes by India’s election commission, she said. Sitharaman expects growth to recover in the next quarter.

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

Inflation surged to 6.2 percent in October, reaching a 14-month high and surpassing the central bank’s target of 4 percent and Salgaonkar talks about rising prices of wheat, cooking gas and clothes among other essential items while incomes in her home have dropped.

While investments in physical infrastructure are likely to continue despite the fiscal constraints, ANZ’s Gupta says, “I think establishing a vision and roadmap to improve India’s human capital [by improving skills and education] will be a welcome step”. It could be the only long-term way to boost growth in the most populous country and the world’s fifth-largest economy.