How Budget 2025 Plans To Address The Economic Divide In India?

India has increased its spending on social welfare and cash transfers to address the vulnerability of the population affected during COVID-19. Free food grains are now provided to 80 crore people, which is more than 50 percent of the population. Additionally, the central and state governments have started cash transfers to women under different schemes like Ladli Behan Yojana, which will cost the state exchequer. The government is focusing on capex to stimulate investments in the absence of private investment. This has led to higher direct and indirect taxes without any benefit to the person paying higher taxes.

The definition of the middle class varies, but for simplicity, we consider the tax-paying class. This category's income ranges from Rs 8 lakh to Rs 5 crore per annum. The taxes paid by the higher-income group are twice that of corporate taxes. This tax-paying class constitutes around ten percent of the population. Direct tax collections have been higher than corporate tax in absolute terms over the last three years, growing at a rate of more than 20 percent.

The middle class is not growing at a rapid pace due to the absence of quality jobs, which means this segment will bear the burden of subsidizing 90 percent of the population. Given that 80 crore people are not skilling themselves and are surviving on doles, they will continue demanding more in the coming years for their votes, while political parties will compete by offering freebies to gain electoral support. Freebies discourage entrepreneurship and make people dependent. Once given, freebies cannot be easily taken back, as seen in the case of free food distribution to 80 crore people. Daily items like crockery, which were once produced in cottage industries to cater to local needs, are now imported from China and other countries.

For the last few years, demand has been weak for mass consumption items and entry-level cars. This is due to the slow pace of middle-class expansion beyond the Rs 10 lakh income bracket. The fiscal consolidation that has been achieved has come at the cost of reductions in the defense and education budgets. Capital expenditure has been slashed in defense, compromising the quality of education. Seventy-five percent of graduates are unemployable due to low skills and a lack of conceptual clarity.

Freebies need to be cut and targeted toward the truly needy, while more expenditure should be allocated to quality education and capital investments in defense. Capital expenditure in defense and infrastructure has multiple complementary benefits due to the downstream and upstream effects of these industries.