India budget: Can Modi 3.0 transform India’s economy?

Down the road from his field, an export-focused furniture workshop has seen its turnover drop by 80% in the past five years as global orders dried up following a post-Covid sales bump.

Rajneesh Tyagi, the owner, said he would have liked to sell locally to mitigate the lull overseas, but continuing rural distress means there’s no demand for his products.

“The farm economy is down and the biggest problem in growing local demand is high debt among the farmers and unemployment,” he added. “They have no capacity to buy anything”.

Mr Tyagi’s business represents a wide universe of micro enterprises that form the backbone of India’s economy. India Ratings, a credit ratings agency, estimates 6.3 million enterprises have shut down between 2015 and 2023, costing 16 million informal jobs.

In contrast, profits reported by India’s 5,000 listed companies rose sharply by 187% between 2018 and 2023, spruced up in part because of tax cuts, according to commentator Vivek Kaul.

Bridging such gaping divides between the formal and informal parts of the economy and bringing prosperity to India’s villages will be the biggest challenges for Mr Modi as he embarks on a third term in office.

His first post-election budget may see a “tilt” towards welfarism though not necessarily a pivot away from more capital spending on big infrastructure projects, economists at Goldman Sachs said in a note.

A larger-than-expected dividend transfer from the central bank (0.3% of GDP) will enable the government to boost welfare spending and maintain capex, with a focus on rural economy and job creation, says the Wall Street bank.

Even those who manage money for some of India’s wealthiest concur with this view.

Rajesh Saluja, CEO and managing director of ASK Private Wealth, says poverty reduction will most likely be on the government’s budget agenda and it can be done “without upsetting the fiscal math”, given the strong revenues and tax collections.