India is one of the fastest-growing major economies globally. With a new government in place, the Union Budget that will be tabled in Lok Sabha on July 23 is an opportunity to provide policy certainty and make India a preferred destination for investments leaving China.
But the Bharatiya Janata Party-led ruling coalition faces heightened challenges as it balances its two key regional partners for survival.
Here are the five biggest problems with the Indian economy and what the budget could do to address them:
1. Unemployment, economic growth
India has faced an employment crisis over the last few years, coupled with an improving yet relatively high trade deficit. The lack of sufficient job opportunities is a pressing concern, particularly among youngsters, which can lead to socio-economic instability. The high trade deficit indicates that India imports more than it exports, which can weaken the country’s economic position.
The budget could support manufacturing in labour-intensive sectors such as apparel, leather, tourism, and hospitality through mechanisms like the production-linked incentive scheme, which can be extended.
Streamlining of corporate restructuring should also be addressed through measures such as reforming the Insolvency and Bankruptcy Code and expanding the pre-packaged insolvency framework to larger companies – which is an out-of-court process that eliminates multiple time-consuming steps in between. Steps should also be taken to implement a service-level, agreement-based admissions process and addressing group insolvency cases.
Rationalising income tax slabs and increasing the standard deduction limit to Rs 1 lakh per annum will boost disposable incomes for the middle class, increasing discretionary spending. These measures will stimulate domestic demand, create job opportunities and enhance India’s trade competitiveness.
2. Fiscal deficit, debt management
Managing the fiscal deficit is challenging, especially with demands from states like Andhra Pradesh and Bihar for “special category status” and larger financial packages from the Centre – including $6 billion in the budget.
A high fiscal deficit implies that the government is borrowing more to finance its spending, which can lead to increased debt levels and higher interest payments in the future.
The budget should embark on measures to widen the tax base, improve tax compliance and streamline subsidies. Rationalising government expenditure and targeting subsidies to the most vulnerable sections can help better manage the fiscal deficit.
Additionally, negotiating trade agreements with major global economies and lowering abnormally high import tariffs will improve India’s trade-to-gross domestic product ratio and promote higher quality exports. Enhancing tax collection efficiency through digital initiatives and reducing tax evasion can also contribute to a healthier fiscal position.
3. Social sector spending
Currently, India allocates only 2.1% of its GDP for public healthcare and 3% for education and skill development, which is insufficient for comprehensive development and leveraging the demographic dividend. Inadequate healthcare spending results in poor health outcomes, especially in rural areas, while insufficient education and skill development investment hinders the potential of India’s young population.
The budget must increase spending to at least 3% of GDP on healthcare and 6% on education. This will support universal health coverage and the goal of becoming a “developed country” by 2047. Gradually increasing research and development spending to 2.5% of GDP will also foster an innovation-led economy, enhancing intellectual property development and patent regime.
Investing in education and skill development will prepare the workforce for future challenges, while enhanced healthcare spending will improve overall quality of life and productivity.
4. Emerging challenges: Climate change and technology
India has announced ambitious climate and technological development goals. However, there are also emerging challenges. As the world transitions to a low-carbon economy, India must adapt to mitigate climate change impacts and seize new technological opportunities.
The budget should introduce a concessional tax regime for companies investing in green technologies and offer incentives for multimodal logistics to reduce carbon emissions. Developing a robust semiconductor ecosystem and rationalising regulations in the fintech sector with tax incentives for startups will support industrial and digital innovation.
Removing the angel tax, which applies to funding that exceeds the value of a startup, can accelerate the growth of India’s startup ecosystem. Promoting research and development in renewable energy, electric vehicles and sustainable agriculture can position India as a leader in climate-friendly technologies.
5. Public spending and infrastructure
India’s infrastructure, including roads, railways, and urban development, lags its economic aspirations. Poor infrastructure hampers business operations, increases costs, and reduces the quality of life for citizens.
The budget should prioritise large-scale infrastructure projects with increased funding for roads, railways, and urban development. Encouraging public-private partnerships and easing regulations to attract foreign investment will expedite infrastructure development. Investing in smart cities, high-speed rail and rural connectivity will create a more integrated and efficient economic environment.
The budget offers a critical opportunity for India to address key economic challenges. The right mix of policies will foster domestic growth and make India a preferred destination for global investments. Balancing fiscal prudence with ambitious reforms will be key to unlocking India’s potential in the coming years. A holistic approach that integrates economic, social and environmental objectives will ensure sustainable and inclusive growth for all citizens.
Jayant Krishna is a senior fellow with the Chair in US-India Policy Studies at the Center for Strategic and International Studies in Washington DC.
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