Growth and fiscal prudence: Modi’s economic challenge

Dipak Kurmi

(The writer can be reached at dipakkurmiglpltd@gmail.com.)

The Narendra Modi government faces a daunting challenge: maintaining
high economic growth while balancing the necessary investment and institutional demands, all without triggering political repercussions. So far, the government has operated with a financial model akin to a “river of wealth,” flowing generously toward the people, ensuring welfare distribution, but following a strategy that relies on reallocating existing resources rather than generating new fiscal avenues.

Expanding Non-Tax Revenue: A Difficult but Necessary Step

Going forward, India must expand its non-tax revenue streams substantially. This expansion can be achieved through aggressive privatization of government-owned companies, the sale of government assets, and reducing the bloat in welfare schemes that no longer serve their intended purpose. However, these measures come with a political risk: alienating key voter bases that have come to rely on government support.

The difficulty of implementing such fiscal discipline in a democracy with long-term political ambitions is evident when contrasted with the United States, where leaders such as former President Donald Trump could take bold financial actions, unburdened by concerns about re-election beyond a four-year term. In India, however, the stakes are different; a government aspiring for long-term governance must tread carefully when trimming welfare expenditures.

Harnessing Tax Revenue and Targeted Welfare

To its credit, the Modi government has been highly efficient in harnessing tax revenue while also ensuring extensive welfare distribution. A 2022 study by Bhalla, Bhasin, and Virmani noted that extreme poverty in India had dropped to an astonishingly low one percent of the population at a poverty threshold of PPP $1.90 per day. However, the World Bank, using a $2.15 per day benchmark, estimated that 12.9 percent of India’s population was still in poverty in 2021. The lack of an official poverty estimate since 2012, due to the rejection of the 2018 census by the government, complicates the accurate assessment of these figures.

The primary mechanism behind this dramatic reduction in poverty has been extensive government welfare programs. Over 800 million people—more than half the country’s population—receive free food under government schemes. Direct cash transfers benefit women, farmers, and the elderly, while healthcare is heavily subsidized through a mix of free public services and low-cost insurance schemes. Additionally, free or highly subsidized electricity and water for small consumers and farmers further ease financial burdens.

Making Welfare Sustainable:

A Smarter Approach

While welfare schemes have been crucial in reducing poverty, efficient delivery is key to ensuring they remain sustainable. Updating poverty estimates is an urgent necessity, as it allows for forensic auditing of welfare programs. The goal should be to identify the minimum level of government support required to keep the poorest 10 percent above the poverty line while implementing a gradual phase-out for those who have improved their financial standing.

However, simply cutting welfare is not the solution. Economic vulnerability remains high among the lower-middle class. Families frequently slip back into poverty due to unforeseen events such as job losses (India lacks an unemployment benefit system), serious illnesses, or the death of a primary earner. A well-designed safety net, including emergency cash grants and community-driven support initiatives, would help stabilize these families and prevent economic backsliding.

Strengthening State-Level

Governance in Social Welfare

A critical issue in India’s welfare distribution is the overreach of the central government in areas constitutionally designated for state administration. The Indian Constitution assigns responsibility for social welfare to state governments, yet the Union government continues to dominate these sectors due to its fiscal superiority. While the Centre has traditionally exceeded its sovereign mandate—which should primarily focus on defense, diplomacy, fiscal management, internal security, and large-scale economic regulations—state governments have largely failed in their financial responsibilities.

State governments have underperformed in tax collection, with property tax revenues being just one-fifth of global benchmarks despite soaring property prices. They have also failed to make agriculture, a state subject, globally competitive while refraining from taxing agricultural income. Furthermore, many states struggle to make essential services like electricity and water supply self-sustaining due to underpricing and mismanagement. Some states have even reverted to financially unsustainable pension schemes, increasing the fiscal burden on their budgets.

GDP Growth and Managing Global Uncertainty

Despite these systemic challenges, India’s economic performance remains robust. In the third quarter of the current fiscal year (October-December), real GDP growth was recorded at 6.2 percent, exceeding the average of the first two quarters. The International Monetary Fund (IMF), in its January 2025 update, projected India’s annual growth at 6.5 percent, positioning the country as a global economic leader. However, this level of growth comes against a backdrop of increasing global uncertainty, including stock market downturns, inflationary pressures, and geopolitical instability.

On a relative scale, India’s GDP growth of 6.25 to 6.5 percent is impressive, especially considering that global economic growth is expected to be 3.3 percent, while emerging and developing Asia is projected to grow at 5.2 percent. However, these figures must be analysed within the context of India’s long-term growth expectations. Unpredictable global developments necessitate a more cautious economic approach, where fiscal prudence becomes a guiding principle.

Fiscal Responsibility: A

Prerequisite for Stability

The Modi government must remain steadfast in reducing the fiscal deficit to below 4.5 percent of GDP by 2025-26 and aim for an even lower target of under 4 percent by 2026-27. Achieving these goals would send a strong signal of fiscal responsibility to domestic and international investors.

At the same time, it is imperative to resist the temptation of excessive public borrowing. Conservative budgeting should be the norm, with digital monitoring systems helping to identify and address inefficiencies in resource allocation. Assuming that inflation is permanently under control would be a fundamental mistake. Recent foreign portfolio investor (FPI) behaviour demonstrates this risk—over the past six months, FPIs have withdrawn approximately Rs 3 trillion from the Indian stock markets due to fears surrounding a strengthening dollar and rising global inflation.

The Road Ahead

Prime Minister Modi’s leadership has always been centred around a performance-driven governance model. The challenge now is to continue scoring high on economic indicators while mitigating fiscal risks and ensuring long-term stability. Achieving this balance will require a combination of strategic investments, targeted welfare reforms, and an unwavering commitment to fiscal discipline. By fostering an economic ecosystem that prioritizes sustainable growth and prudent financial management, India can secure its position as a global powerhouse while safeguarding the economic well-being of its citizens.