The Union Budget 2025 and The New International Order

Anup Sinha

The national budget, in any private-enterprise, market-driven economy, is supposed to ensure that the state facilitates capital accumulation and keeps the other classes under hegemonic control. In economies where the reproduction of the system is stable and predictable, the budget is passed without much fanfare, with minimum media-attention. In India, however, the exercise receives a lot of attention from the press and the electronic media precisely because state power is a heterogeneous mix of classes and interest groups that do keep changing over time. In India there is an added complexity triggered by poverty and deprivation. The budget is looked upon as a distributional game where the privileged producers and affluent sections of the population must receive their share of the fiscal resources, while the large multitude of the relatively poor and deprived have to be pacified and kept in control. Political stability demands a sharing of the total fiscal resources – the tax revenues collected as well as the expenditures planned. Hence the keen anticipation with which the budget is awaited every year and the loud discussions that follow its presentation. If the economic elites are pleased the stock market reacts positively, otherwise it tanks. Budgets do not change the structure of the economy or address systemic problems.

This year’s budget is no exception to this pattern. The finance minister had two basic premises that were a little different from that of the previous year. The first was that the NDA government is no longer controlled exclusively by the Bhartiya Janata Party (BJP). Coalition politics would have to be addressed squarely especially for the states of Andhra Pradesh and Bihar. The second, arguably more important fact was that economic growth had slowed down this year with savings and investment turning south as well as producers experiencing inventory pile-ups. Interest rates were considered high, inflation was still not at comfortable levels, and a persistent noise about the shrinking Indian middle class. Capital does not like macroeconomic growth to slow down. The economy must be stimulated to increase demand and hence sales and profits. This can be done by cutting taxes so that people have more take-home income to spend. The other method is to increase government spending on goods and services so that demand from the public sector increases. However, tax cuts are hugely popular. Spending hikes are looked upon with suspicion. Two reasons for this: it enhances the presence of government in the private economy, and it increases the burden of debt since the bulk of the extra spending is undertaken through increased market borrowings through the sale of government bonds, which have to be paid back at a future date with accumulated interest.

In this year’s budget, Nirmala Sitaraman has done the expected things, given the context of the budget. First of all, she has reduced some amount of personal income taxes for the middle class. This class is vocal, votes for the ruling parties, and if treated well could become a strong political base. This act of cutting taxes would have some effect on total demand in the economy, where it is expected that these people with a bit of extra money in their pockets would purchase more of consumer goods, especially the fast-moving consumer goods, sales of which were languishing in the recent past. However, there are a few things that ought to be kept in mind about this cut. The number of people to be affected by this rise in disposable income is really a tiny part of the total population of the nation. The total impact could be insufficient to turn the sluggish aggregate demand around. The bulk of India’s population is not required to pay direct taxes since their incomes and earnings are far too low. It is some part optics that give a message that the minister cares for the rate of growth and is facilitating growth by boosting demand. Simultaneously, she has kept the overall fiscal deficit at 4.4 percent, down from 4.8 percent as estimated to be the result for the current fiscal year. She gives the picture of being disciplined and mindful of debt obligations not getting out of hand because that would signal instability, a situation disliked by the powers that be.

In the context of instability, this year’s budget came at a time when global uncertainties were elevated to an extraordinary level because of Donald Trump taking over the presidency of the USA and coming to power with an absurdly (almost lunatic) disruptive agenda, which he is implementing with almost a vengeance against the American state and people. Trump has begun, as he had promised, to impose trade tariffs and upend the entire global supply chains, and trade patterns. It is not clear where India fits in, in Trump’s scheme of friends and enemies. From India’s point of view, it is good to wait and watch what Donald Trump’s playbook is really like. One strategy would be to prepare for more “expensive exports” from India if the nation faces restrictive US tariffs. Hence letting the rupee float and depreciate, and keeping customs duties as low as possible would be of help as India will have to reduce dependence on the USA for international trade. The rationalisation of customs duties announced in this budget is reflective of a signal sent by the Indian state that it is aware of what is likely to come. The optics of it: a signal to the producers and the owners of capital that the Indian state will provide needed support. In this context, one longer-term issue remains. India will have to look for more enduring trade partners and take a re-look at its foreign policy and its assessment of China as a friend or foe.

As far as expenditures are concerned, there is no basic change in the patterns of disbursement. As in every budget speech, some schemes are announced with great fanfare whose political impact may be much more than their economic worth. Every sector and every class must get some gifts, like old Santa Claus distributing toys to children waiting eagerly. Old toys and new toys are mixed up. Agriculture receives something, public investment in infrastructure gets a bit, the social sector gets some, and new toys like Artificial Intelligence (AI) receive something too. However, when all toys have been pulled out, and one examines the granular data on the increases and cuts in expenditures, most expenditure hikes will be cosmetic, spread thinly, and more often than not the items that really matter hardly receive hikes that cover the inflationary impact on the real value of the number.

Budgets are never meant to be a tool of structural change. It is a tool for perpetuating the essential structure of the economic system. Changes can happen, but always these are within the system’s limits. Hence, as expected, the budget did not address any fundamental challenges faced by the economy. There are many such that might be listed. For instance, India’s economy, like much of the world’s nations, is experiencing a massive rise in economic inequalities – both in terms of wealth, as well as, in terms of income distributions. The number of dollar billionaires is on the rise from two-digit numbers to four-digit numbers. On the other hand, the number of people whose real income is declining and bringing them closer to the poverty line has been increasing by millions, especially since the pandemic when many structural features of the economy changed. Hence, the talk of a vanishing middle class which was supposed to be the pillar of the market economy. Economic inequality necessarily reduces demand for what is called wage-goods which the poor and most of the middle class consume. On the other hand, a tiny (but the absolute number may look impressive in a populous nation like India) super-rich class buys the latest gadgets, ultra-expensive cars, branded designer clothes, watches and shoes. That demand is limited. In such a situation, therefore, the aggregate rate of growth cannot be very high and will require state interventions frequently.

A second feature of the changing pattern of demand is that in the world of rapidly changing technologies, the employment potential of this luxury sector is low, and shrinking as labour-saving techniques fuelled by robotics and AI gain ascendancy. Structural unemployment might even rise with macroeconomic growth. The country has already been experiencing what is referred to by analysts as ‘jobless growth’ where employment growth is not a good as the rate of growth warrants. The labour market has changed considerably. There are informal workers in the gig economy with no stable income or benefits. There are other low-productivity low-earnings jobs like shop assistants, delivery riders, or security guards who can be seen all over the place. These jobs are risky, low paying, long hours, and have no benefits attached to them. Even many of such jobs are likely to disappear with the large-scale adoption of AI and related technologies. The budget is eerily silent on the problem of unemployment and poor quality of available jobs.

A third feature is the condition of Indian agriculture. The much-touted Green Revolution is over. The land-holding patterns and access to credit remain as complicated as they were twenty years ago. There has been, on top of this, since the pandemic, a pressure of return migration on land. Hence, even with a shrinking non-agricultural aggregate demand, internal consumption of the agricultural sector has increased. Hence the marketed surplus is not growing fast enough, leading to a rise in food price inflation. The Reserve Bank of India (RBI) has been partially successful in controlling the inflationary momentum. However, a fallout of that has been a long-continuing high-interest regime. Now, the message came loud and clear for the new RBI governor to cut rates (which he has done in his first Monetary Policy Committee meeting) to stimulate credit off-takes. This is of course, if commercial banks pass on the cut on to their lending rates. The finance minister has made it clear that she does not mind seeing the independence of the RBI getting diluted a bit and wants the RBI governor work in unison with the government.

What might the impact of the budget and the expected headwinds from the global economy be for the forthcoming year? Three impacts can be considered. First of all, the boosting of demand and growth is likely to be small since domestic investors will be reluctant to invest heavily in new projects in an extremely uncertain and unpredictable international atmosphere. These uncertainties will impact India too. The second impact would be how India navigates a changing alignment of international trade forces, especially moving away from the USA towards China. In both cases, India will have little choice in determining favourable outcomes. On top of it, if India decides not to bow down to the whims of Trump, the government of India will have to eat humble pie and mend fences with China. This is not a pleasant solution for Narendra Modi. The third possible impact in the near future will be whether India can, in the disruptive situation, get hold of foreign partners who might look favourably to India as an alternative to China to produce or make in India. There are bound to be opportunities that open up. There will be hard costs too that India might have to bear.

The forthcoming year that is 2025-26 may well be marked by the rise of a variety of fascism in the world’s largest economy. There are many miniature Trumps that are visible in many countries of the world. It remains to be seen whether they feel emboldened to consolidate their arbitrary powers on their peoples, or they allow Trump and his high-tech battalion to rule the world – a world likely to be marked by new rivieras and golf courses, as well as, by large new prisons and many detention camps. The liberal order has come to an end, but capitalism has not. It is time, as an old sixties song urged, to “send in the clowns”. India waits.

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Frontier
Vol 57, No. 35, Feb 23 - March 1, 2025