Will Budget 2025-26 ease middle-class burden? | Talking Sense with Srini

India's economy stands at a critical juncture as the government prepares for the crucial budget session. With the country's GDP growth at its weakest since the pandemic, coupled with high food inflation and rising unemployment, Finance Minister Nirmala Sitharaman faces a daunting challenge of balancing growth and fiscal discipline.

Gloomy financial metrics

Speaking on the state of the economy in the YouTube program Talking Sense with Srini, The Federal's Editor-in-Chief S Srinivasan explained: "The GDP growth fall has been alarming, with the second-quarter figures at 4.7 per cent. The fall in urban consumption and persistently high food inflation, which stands at nearly 9 per cent, have compounded the issue."

The rupee's recent 3 per cent depreciation has further strained the economy, with foreign investments seeing a significant outflow. "These external factors are creating an uncertain economic environment," he added.

Growth vs inflation

The government now faces a pivotal decision: prioritise growth or focus on containing inflation. While growth is critical for India to maintain its status as the fifth-largest global economy, the Reserve Bank of India (RBI) is keen on keeping inflation within its 4-6 per cent tolerance band.

"Managing inflation without derailing growth will be key," noted Srinivasan. "The finance minister must decide whether to continue fiscal consolidation or allocate more resources to stimulate the economy."

Capital expenditure and private investment

India's growth remains heavily reliant on government-led capital expenditure. However, private investment continues to lag, with capacity utilisation stuck at mid-70 per cent.

"Private corporations are hesitant to invest due to low consumption levels," Srinivasan remarked, adding that a structural adjustment in policies is required to spur demand and attract investments.

Challenges in manufacturing

Manufacturing growth, a critical pillar for economic progress, has remained stagnant, with its contribution to GDP hovering around 12–13 per cent. Despite the government's Production-Linked Incentive (PLI) schemes showing promise in sectors like electronics and solar power, the overall impact has been limited.

"Manufacturing is concentrated in a few states like Tamil Nadu, Gujarat, and Maharashtra," Srinivasan said. "To achieve the target of 25 per cent GDP share, structural challenges like high power and transport costs must be addressed."

Human capital and employment

Another pressing concern is India's unemployment rate and lack of focus on human capital development. Economist Raghuram Rajan recently emphasised the need to invest in education and skill development to drive sustainable growth.

"Employment-focused industries and skilling initiatives should be prioritised," Srinivasan stressed. "The government's Employee Linked Incentive (ELI) scheme is a step in the right direction, but it requires more time and effective implementation to make a significant impact."

Way forward

As India aims to become a developed nation by 2047, the upcoming budget will be crucial in setting the course for its economic future. The government must balance short-term measures with long-term structural reforms to ensure inclusive and sustainable growth.

"The middle class must ensure the focus remains on real issues," Srinivasan concluded.

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