The growth rate of the economy has been slowing, and consumption is also growing at a slower pace. However, there are some more issues, which we have to consider when we examine the Budget for financial year 2026.
First, apart from the growth slowdown, it comes at a time when gross savings in the economy are not increasing. Second, as consumption is not growing, corporate earnings are not growing at a fast pace, which has implications for investments. Third, household debt is increasing, not at a startling pace compared to some other emerging economies, but it will have an impact on aggregate demand in the economy.
Against this backdrop, the Budget is presented with an overall strategy to increase demand in the economy. Thus, the question is, will the Budget make people consume more and revive the economy?
1 August 2025
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Demand Revival Vital
It is vital to have a demand revival at this stage for the economy to move to a higher growth trajectory. The Budget uses a combination of strategies for this. First, it provides tax relief measures to certain sections of the population who have some spending capacity. These segments had a reduction in their disposable incomes due to creeping inflationary pressures.
Second, there is continuity in the relief measures provided to the lower-income strata. Third, there is the continued push for capital expenditure, which is expected to generate multiplier effects and more demand. As in previous Budgets, groundwork for infrastructure push is done in this Budget as well. However, it is time to take stock of these projects in terms of execution before more money is pumped into capex expansion.
In spite of all these measures from the government, the private sector’s response is still lukewarm, necessitating continued fiscal stimulus. At the macro economy level, fiscal stimulus has been introduced through three main routes:
First, an additional disposable income to the extent of nearly Rs 1 lakh crore foregone through direct and indirect taxes
Second, the Government of India’s capital expenditure growth budgeted at 10.1%
Third, a facility for state governments to borrow interest-free loans to the extent of Rs 1.5 lakh crore for infrastructure and other investments.
It is expected that this stimulus would prove to be effective along with other fiscal and monetary measures in stimulating private investments.
Targeted Development
The Budget portrays a vision of targeted development of agri-districts with PM Dhan Dhanya Krishi Yojana and the launch of national missions for high-yield seeds, fruits and vegetables. To maximise impact, effective adoption of new technologies and sustainable practices are crucial, for which these initiatives have to be integrated with skilling programmes.
The Budget also attempts to lay the groundwork for India’s emergence as a global manufacturing and innovation hub. This is articulated by regulatory reforms, supply-chain integration and sustainability-driven growth.
The Rs 20,000 crore allocation for private sector-led research, development and innovation and the additional Rs 10,000 crore fund of funds is intended to accelerate deep-tech start-ups.
The Rs 500 crore AI Centre of Excellence will further India’s leadership in next-gen technology. However, maximising the impact of these policies will require stronger collaboration between industry, academia and the government.
To accelerate the manufacturing sector’s growth, structural reforms have been announced. These are intended to enhance the ease of doing business by simplifying compliance and boosting exports.
The government is looking for a revival [of demand], but the extent of that depends on a number of factors—domestic and global
To unlock new investment potential, the National Geospatial Mission and PM Gati Shakti have been planned in order to modernise land records and infrastructure planning. Complementing these economy-wide measures are some key sectoral reforms. Major announcements in this direction include MSME credit expansion, Rs 30,000-crore UPI-linked credit cards and targeted support for footwear, leather and toys.
It is also noteworthy that there has been emphasis on clean-tech investments in electric vehicle (EV) batteries, solar photovoltaic (PV) and electrolysers, which will strengthen domestic value chains. The success of these, however, hinges on efficient execution, policy stability and the extent of global integration.
Impact on Demand
Will these initiatives enhance demand? I think we will have to wait and see. An element of the government’s uncertainty about this is reflected in the projection of nominal GDP growth, which is slightly on the conservative side entailing a narrower base for resource mobilisation.
Compounding the problem is the fact that household finances are under stress due to increased debt. Under this circumstance, the income tax relief may be channelised for savings rather than consumption, and to repay some borrowings. If this happens, the kind of growth we are expecting because of higher demand will not happen.
Anticipating such a possibility, the government has a conservative growth projection. The other possibility of demand enhancement is to accelerate employee growth. The Budget’s approach to this is to tinker with certain industries such as leather and toy manufacturing that absorb labour.
The narrative emerging from the Budget is that the income tax-paying middle class of India would benefit and change the economy in a big way. However, we will have to wait and see how the economy performs.
Yes, the government is looking for a revival [of demand], but the extent of that depends on a number of factors—domestic and global. As the global trade and financial situation is not very rosy with looming trade wars, domestic demand and its constituents will hold the key.
The writer is director, Madras Institute of Development Studies and former adviser to the EAC
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