India’s economic growth strategy in 2025 focuses on boosting household consumption. Other growth drivers like private investment and net exports face challenges. Government expenditure remains strong but cannot grow at previous high rates. This shift aims to sustain growth amid global uncertainties and domestic constraints.
Current Economic Context
India’s economy depends on household consumption, private investment, government spending, and net exports. Recently, government expenditure grew robustly due to infrastructure projects and interest-free loans to States. However, capital spending by the Centre will slow from the rapid post-pandemic pace. Private investment is rising but not enough to achieve an 8% growth target. Net exports struggle due to global trade tensions and tariffs, especially from the US. Thus, household consumption becomes the main engine for growth.
Role of Household Consumption
Household consumption is less affected by global issues. It can drive demand and stimulate private investment. But consumption growth requires higher incomes or lower prices. The government aims to encourage spending by both methods. This is crucial as other growth components face limitations.
Price Reduction via GST Reforms
Recent GST reforms reduce tax rates on many goods and services. Over 75% of rural expenditure is now taxed at 0% or 5%, up from 56%. For urban consumers, the share of low-tax items rose from 50% to 66%. This reduction lowers prices and can boost consumption by making goods more affordable.
Income Enhancement Measures
The 2025 Budget cut income-tax rates to increase disposable income. This step is necessary but insufficient to change spending habits . Many people prefer saving extra income rather than increasing consumption. Wage growth could help but is limited by labour oversupply and skill shortages in most sectors.
Challenges in Private Investment and Exports
Private investment must grow faster to meet economic targets. Industrial capacity utilisation remains below 80%, indicating room for expansion. However, demand must rise first to incentivise investment. Net exports face headwinds from global uncertainty and high tariffs, reducing foreign demand for Indian goods.
Labour Market and Skill Deficit
India has an oversupply of labour, limiting wage increases. A skill gap persists, restricting productivity and higher earnings. Addressing this deficit is critical for boosting incomes and sustaining consumption-led growth.
Government’s Balanced Fiscal Approach
The government continues capital expenditure but at a moderated pace. It balances infrastructure, defence, and social priorities. This fiscal prudence means other sectors, especially private investment and consumption, must play larger roles in growth.
Questions for UPSC:
- Critically analyse the role of household consumption in sustaining economic growth in emerging economies with examples.
- Explain the impact of Goods and Services Tax (GST) reforms on consumer behaviour and economic growth in India.
- What are the challenges faced by private investment in India? How can government policies address these challenges?
- Critically examine the relationship between labour market dynamics and wage growth in developing countries. With suitable examples, suggest measures to bridge skill deficits.
