Amidst global uncertainties, the Indian economy has demonstrated remarkable resilience, with its real GDP averaging 8.3 per cent in the last three fiscal years.

However, a few signs of moderating economic momentum have emerged, as real GDP growth for the second quarter of current fiscal decelerated to 5.4 per cent as compared to 6.7 per cent in the previous quarter.

While the current economic slowdown is most likely transient, attributed largely to election-related decline in government expenditure and a surge in food inflation due to uneven monsoon patterns, targeted government interventions could provide necessary fillip to growth.

In this article, I will outline specific policy suggestions aimed at boosting demand drivers of growth which will help push growth higher in the near term. Per the GDP data, private final consumption expenditure, moderated to 6.0 per cent in Q2 from 7.4 per cent in the previous quarter, primarily due to a slowdown in urban demand, driven by high inflation and interest rates.

Boost consumption

For growth to sustainably rise, the upcoming Budget could emphasise targeted government interventions to stimulate consumption, given its significant share of about 60 per cent in India’s GDP.

Persistent food inflationary pressures affect purchasing power of consumers, particularly lower-income rural households who allocate larger share to food in their consumption basket.

Our analysis using the latest survey of Household Consumption Expenditure Survey 2022-23 shows that the share of food in average monthly per capita consumption expenditure (MPCE) of bottom 20 per cent fractile income class of rural households is 53.3 per cent, compared to 49.3 per cent for their urban counterparts and 49.6 per cent for top 20 per cent of rural households.

This reflects the vulnerability of low-income rural households that are disproportionately strained by rising food inflation.

While recent quarters have shown promising signs of recovery in rural consumption, supported by normal monsoons, increasing per unit benefits under flagship schemes like MGNREGS, PM-KISAN, and PMAY could further enhance this recovery. The government could consider increasing minimum wage under MGNREGS to ₹375/day from the current ₹267/day, PM-KISAN payouts to ₹8,000 annually from ₹6,000, and unit cost under PMAY-G and PMAY-U which has not been revised since the scheme’s inception.

Additionally, the government could also consider providing ‘consumption vouchers’ to people in lower income group. The vouchers could be designed to be spent on designated items (specific goods and services) and could be valid for a specified time (like 6-8 months), to ensure spending. The beneficiary criteria can be defined as Jan-Dhan account holders who are not beneficiaries of other welfare schemes.

Household savings have witnessed signs of weakening, with bank deposits declining as a proportion of household’s financial assets from 56.4 per cent in FY20 to 45.2 per cent in FY24.

Low returns on bank deposits compared to equities and mutual funds, coupled with a higher tax burden on interest income, have made bank savings less attractive. Taxing interest income from deposits at a lower rate and reducing the lock-in period for fixed deposits with preferential tax treatment from current five to three years, can help boost bank deposits.

Spur capex

As previously mentioned, the election-related stalling of government investment plans led to a deceleration in investment in the second quarter. Given the significant multiplier impact of government capex spending, government could consider increasing the capex by 25 per cent in FY26 to ₹13.9 lakh crore over FY25 Budget estimates to support growth.

In fact we have seen a sharp increase in government spending in the month of October itself, which should help with the figures of the third quarter.

Further, increasing the support to State capex by 10 per cent to ₹1.65 lakh crore in FY25 and linking it to milestone-based reforms can further help in boosting investment. Rural infrastructure needs to be particularly prioritized to provide continued support to stimulate rural income and enable social transformation. Effective prioritization of projects based on high growth multipliers, strong returns on investment, regulatory ease, and potential for asset monetization would maximise the efficiency of government spending. While bolstering domestic demand drivers is crucial for supporting growth, a robust financial system is also essential for meeting the financing needs of a rapidly growing economy. India’s banking sector, while resilient, needs to be scaled up to meet the demands of a growing economy.

This can be done by granting more banking licenses and converting a few large non-banking financial companies into full-fledged banks. The government may also consider reintroducing the Emergency Credit Line Guarantee Scheme (ECLGS), which lapsed in March 2023, to continue providing guaranteed credit support to MSMEs and select labour intensive sectors.

A robust performance by domestic demand drivers is essential for keeping the Indian economy on track to achieve its potential growth rate of 7-7.5 per cent in the near to medium term. The upcoming Union Budget offers an ideal opportunity to implement these suggestions.

The writer is Director-General, CII