Opinion | Consumption, Private Investment: The Twin Challenge For Budget FY25

Finance Minister Nirmala Sitharaman is set to present the Union Budget on July 23 as expectations soar. Despite India's impressive 8.2% growth in FY 2023-24, the fastest among major economies globally, the nation faces significant challenges, including sluggish consumption growth and tepid private investments.

Allies like the Telugu Desam Party (TDP) and the Janata Dal (United) (JD-U) are also exerting pressure for their share. The setback in the Lok Sabha 2024 election and forthcoming contests in four states may lead to some populist measures. However, maintaining fiscal discipline, as has been the case in most of the last 10 years, is crucial.

India Thrives On Demand

India stands at a critical juncture in its growth trajectory towards becoming the world's third-largest economy under Modi 3.0. Unlike export-driven China, India's economy thrives on domestic demand.
Private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) are pivotal to the country's GDP. PFCE constituted 55.8% of GDP in FY 2023-24 but grew at a two-decade low (excluding the pandemic year), expanding by just 4%, half the GDP growth rate.

In the post-COVID era, despite providing free ration to 80 crore people, rural distress persists, leading to weakened rural demand. Agriculture grew by only 1.4% in fiscal 2024, well below its pre-pandemic decade average of 4.4%, reflecting lower rural incomes and dampened consumption.

India's household debt soared to a record 39.1% of GDP in Q3 FY 2023-24, a 16.5% year-on-year increase, highlighting widespread financial strain.

To stimulate consumption, more disposable income must be available for spending. This could be achieved through a combination of tax cuts and cash income support schemes. Many states currently offer cash support to women and unemployed youth.

There is a growing demand to increase the PM Kisan Nidhi payout from Rs. 6,000 annually to Rs. 8,000-9,000 to offset inflation over the past five years, potentially benefiting the BJP in the upcoming state elections.

Tax Relief Expectations

Tax slabs and deduction limits in the old regime have remained unchanged for years, prompting expectations of relief among the middle-income salaried class. Whether the government, aiming to phase out the old tax regime, will make adjustments remains to be seen. Increasing the exempt income threshold or enhancing standard deductions in the new tax regime could spur consumption, boost demand for goods and services, improve corporate operating ratios, and stimulate capital expenditure and job creation, thereby triggering much-needed economic multiplier effects.

GFCF, comprising investments by households, government, and the private/corporate sector, accounted for 33.5% of GDP in FY 2023-24. Although showing signs of recovery with a 9% growth in FY 2023-24, up from 27% in FY 2018-19, it has yet to reach its peak of 36% of GDP observed in FY 2006-07.

Boosting Private Investment

In India, private investment saw a significant surge post-liberalisation until the global financial crisis of 2007-08, peaking at around 27% of GDP from about 10% in the 1980s.

However, since 2011-12, private investment has been on a decline, hitting a low of 19.6% of GDP in FY 2020-21 (excluding the pandemic year, when it dropped to around 10%).

In Modi 2.0's first budget in FY 2019-20, the government slashed the corporate tax rate from 30% to 22% to stimulate private investment. Unfortunately, this coincided with the onset of COVID-19, which dampened demand for goods and services, thereby limiting the intended benefits of the tax cuts in stimulating fresh capital expenditure and job creation.

The tax cut would have potentially provided around Rs. 5 lakh crore in benefits to the corporate sector over the last five years. Individual tax collections in India surged by a remarkable 76% between FY 2018-19 and FY 2022-23. However, the corporate sector's share of these tax collections increased only marginally, to just 24.45%.

The corporate sector is holding back on capital expenditure due to sluggish demand, evident from manufacturing companies operating at only 64% capacity utilisation in the September quarter of FY 2023-24. The optimal capacity utilisation for stimulating fresh investments is around 85%, underscoring the urgent need for boosting consumption to revive the economy.

Navigating A Complex Landscape

MSMEs are also advocating for a special package as the benefits of the tax cuts have largely favoured larger players. Many are ineligible for the PLI (Production-linked Linked Incentive) scheme, prompting calls for an ELI (Employment-linked Linked Incentive) scheme tailored to MSMEs, offering concessions or subsidies tied to employment generation.

Despite these challenges, India has committed to a fiscal roadmap for rating agencies, aiming to reduce the fiscal deficit to 4.5% of GDP by FY 2025-26, leaving the Finance Minister with limited fiscal space. How she navigates these fiscal constraints while simultaneously boosting consumption and encouraging private investment remains to be seen.

(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)

Disclaimer: These are the personal opinions of the author