This is the time when a lot of comments about the economy abound in anticipation of the forthcoming budgetary announcements. The most important aspect of the performance of the Indian economy has been the slowing down of macroeconomic growth. The final figures are yet to come in for 2024-25 but some economists feel that they could end up even lower than what is estimated currently. Obviously, pundits have started analysing the reasons for this deceleration. A consensus that is emerging from available evidence is that the much talked about Indian middle class seems to be shrinking significantly. This had started from the days of the pandemic but continues unabated. The result has been that the number of people clustered around the poverty line has increased. It is interesting to note that most state governments have increased transfer payments to the poor — the much-debated freebies as these are referred to. But the rich have continued getting richer. In fact, the number of billionaires has increased in India during the recent past. What this means is not just the rise in inequality but that the demand for consumer goods has also slowed down, barring some of the more expensive goods categorised as luxury goods. Since income growth has stagnated, household savings have also dropped as a percentage of national income.

Given this situation, the finance minister, Nirmala Sitharaman, has a challenge to boost growth while keeping fiscal prudence in mind. Stimulating public investment further and incentivising private investment ought to be at the top of the budgetary considerations. It is time to consider a restructuring of the progressive income tax-regime; there should be tax-relief for the lower income groups and higher taxes for the super-rich. There is not much scope for playing around with deficits. First, the Eighth Pay Commission is expected to revise wages upward in the government sector in the near future. This will be followed by hikes in state government wages and in the public sector. The fiscal deficit is bound to be strained by those revisions. The second reason pertains to the large-scale uncertainty surrounding the international trade and investment environment with the advent of the new regime in the United States of America. There are other areas that must be looked into. For instance, India’s spending on the social sector, especially on health and education, must be revised to augment growth.