Editorial 2 : Lower taxes spur buying, but jobs and incomes will have to grow
Context: The Indian economy is currently navigating a challenging phase shaped by domestic policy decisions, global uncertainties, and evolving consumption patterns. Recent data indicate that lower tax burdens and an improved supply environment have supported consumption growth. However, the sustainability of this demand revival hinges critically on employment generation and meaningful income expansion.
Consumption boost through lower taxes and supply-side improvements:
- The government’s efforts to rationalize indirect taxes and reduce logistics bottlenecks have played a central role in spurring consumption.
- GST rate rationalisation and targeted cuts in import duties have reduced the cost of goods, especially in sectors like electronics, automobiles, and FMCG.
- Correspondingly, India’s non-oil goods exports have displayed resilience, aided partly by front-loaded demand in advanced economies before tariff increases take effect.
- Industrial production data reflects consistent growth in manufacturing, supported by robust performance in capital goods, construction materials, and food processing.
- A good monsoon and increased procurement support prices have strengthened rural sentiment.
- These developments have collectively driven moderate growth in domestic consumption during the first half of the year.
Exports supported but External risks persist:
- On the external front, India’s merchandise exports grew at a modest pace despite global headwinds.
- High US tariffs on certain goods created a temporary surge in shipments before the tariff hike took effect.
- Nevertheless, prolonged geopolitical uncertainties, weak global growth, and supply chain realignments continue to cast a shadow on export prospects.
- Capital flows are likely to remain volatile amid global monetary tightening.
- While India has benefited from steady remittances and robust services exports, the risks of global financial fragilities remain pertinent.
Services Sector Remains a Key Strength:
- India’s services sector continues to act as a major stabilizer.
- Sectors like IT, business services, travel, financial services, and communication have shown consistent expansion.
- Global Capability Centers (GCCs) have been scaling up operations in India, boosting high-skilled employment and raising foreign investment inflows.
- However, even as services exports contribute significantly to the current account, domestic demand in services such as retail, housing, and hospitality will need deeper support from employment-led income growth.
Government Spending and Fiscal Expansion:
- Government expenditure has played a counter-cyclical role.
- Capital expenditure especially on transport infrastructure, energy corridors, and digital connectivity has remained a core driver of economic activity.
- Yet, concerns about future fiscal consolidation remain, especially given the widening revenue deficit stemming from lower tax collections.
- While lowering taxes stimulates consumption in the short term, it may reduce fiscal flexibility unless offset by higher economic growth, improved compliance, or expanded tax bases.
Employment as the Critical Missing Link:
- Lower taxes alone cannot sustain long-term consumption unless household earnings rise.
- Employment generation has not kept pace with the expanding working-age population.
- Sectors like textiles, construction, and MSMEs which traditionally absorb large labour pools have been slow to fully recover post-pandemic.
- Automation trends and the global slowdown further complicate the employment scenario.
- To ensure durable consumption growth, India needs:
- Higher-quality job creation, especially in manufacturing and formal services
- Greater female labour force participation
- Skilling and reskilling initiatives aligned with emerging industries
- Policy incentives for labour-intensive sectors
Way Forward:
Lower taxes and improved supply conditions have provided short-term momentum to consumption. Yet, without strong employment creation and rising household incomes, this momentum cannot be sustained over the medium term. The Indian economy’s next phase of growth will depend less on tax stimulus and more on generating stable, productive, and broad-based income opportunities for its population. Ensuring this transition is crucial for achieving durable, inclusive, and resilient economic growth.