How Budget 2026-27 can revive consumption for inclusive growth

As Finance Minister Nirmala Sitharaman prepares to present her ninth consecutive Budget, she must address numerous challenges. Among the biggest challenges is reviving consumption demand. Afterall, consumption is a key growth engine that accounted for, on average, 56.8 per cent of the GDP (at constant prices) during FY24-FY26.

As the graph below shows, in the post-pandemic phase, growth in private final consumption expenditure (PFCE), or consumption growth, continues to lag behind GDP growth except for FY25, effectively proving a drag on overall growth.

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Even though the 2025 Budget gave a huge relief on personal income taxes and there was a GST cut in the second half of the year, everyday consumer spending didn't pick up much in the first half of FY26 or according to the full-year forecast (advanced estimate, or AE).

Why does consumption/demand growth lag behind GDP’s growth? It is because the incomes of most Indians are not rising.

Slowing income and consumption

There is other evidence to show slowing income and consumption. Here are a few:

1. Growth in gross direct tax is half of GDP in H1 of FY26 (8 per cent). As of January 11, 2026, year-on-year growth (from January 11, 2025) fell to 4.1 per cent — from 19.9 per cent in the corresponding previous period (January 2024 to January 2025). Growth in corporate tax slowed down to 7.7 per cent, from 16.5 per cent and non-corporate personal income tax to 1.2 per cent, from 21.7 per cent. This can be attributed to lower corporate profits and lower incomes, both pointing to a slowdown in economic activities.

Growth in gross GST was lower at 8.6 per cent during April-December 2025, compared to 9.1 per cent in the previous corresponding period, but that was due to the GST cuts in September 2025.

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Overall tax-to-GDP remains below 12 per cent since at least FY17.

2. Employee Provident Fund Organisation (EPFO) data show that formal sector quality jobs fell from 13.9 million in FY23 to 13 million in FY25 — despite multiple job incentives, such as the PM-RPY of 2018, ABRY of 2020, PLI and DLI of 2020, PMIS of 2024 and ELI of 2025.

3. India Inc is going through “creeping informalisation” of jobs, and wages have stagnated despite “swimming in excess profits”, as Chief Economic Advisor (CEA) Anantha V Nageswaran and his Economic Survey of 2023-24 flagged.

4. Industrial production is falling. Growth in general IIP (Index of Industrial Production) fell to 4 per cent in FY25 and to 3.3 per cent during April-November 2025. Core IIP growth slid to 4.5 per cent and 2.4 per cent, respectively, in the same period. Both point to falling demand.

5. Headline inflation averaged 1.7 per cent during April-December 2025, below the RBI’s lower tolerance band of 2 per cent. As economists will tell you, this can’t happen due to lower food inflation (averaging -1.2 per cent during the same period). It is due to a fall in income.

The SBI Research’s November report showed ‘real’ wage growth fell to 0.5 per cent in FY26 (P), after being negative during FY20-FY23 and barely crossing 1 per cent in FY24 and FY25. This points to an income crisis.

6. Households’ financial health has weakened. Net assets (physical and financial) fell to a new low of 18 per cent of the GDP in FY24 (up to which data is available), and debt went to a high of 41 per cent of the GDP in FY25.

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7. Skill India has proved a disaster. The Comptroller and Auditor General (CAG) reported that in phases 2 and 3 (2016-2022), direct cash transfers as incentives to 95 per cent of certified youth were through fictitious bank accounts. This means money was syphoned off, and 95 per cent got no skill training. The Economic Survey of 2023-24 said, “Only 4.4 per cent of 15-29 years have formal vocational/technical training”. Such low skill levels mean low productivity.

Imperatives of Budget 2026

The issues above need quick redress, and these are some steps that Sitharaman should consider:

(a) Focus on creating more quality jobs, raising the minimum wage and universalising social security cover — given that only 10 per cent of total jobs of 643.3 million (in 2023-24) are quality jobs with social security cover.

The following graph uses PLFS data to map the job status.

(b) Disband all job schemes listed earlier, which essentially transfer money to corporates to subsidise workers, without producing quality or permanent jobs.

(c) Reverse the dilution of MGNREGA (now 'rebranded' as VB-G RAM G), which translates into depriving about 62.5 million rural households (over 30 per cent) direct income source. But this seems unlikely because the Centre, earlier this month, privately circulated a dubious study of NITI Aayog claiming that farmers’ income more than doubled in the past 10 fiscals. The assessment is based on GDP numbers, known for overestimations, and a wrong metric to measure farmers’ income. In fact, expanding MGNREGA to urban areas, as Rajasthan did in 2022, may be an idea to debate, given the chronic job crisis.

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(d) Rework the four new labour codes, which are apparently anti-worker, providing more room for exploitation. For this, the Centre should:

(i) do away with Fixed-Term Employment (FTE) that threatens to replace permanent jobs without providing job security or long tenure

(ii) give legal status to millions of extremely lowly paid gig/platform workers as ‘employee’ or ‘worker’ to ensure they get minimum wages and social security cover, as the US and Europe have done

(iii) bring millions of workers under central schemes, such as VB-G RAM G, ASHA/ANM, Anganwadi workers/helpers, under minimum wage and social security coverage.

Quality jobs best to boost income

Fancy schemes and doles may make electoral noise, but jobs are the best tool to redistribute wealth generated from growth. Quality jobs are ideal to raise income and consumption demand, and also generate revenues for development.

Else, India will perpetuate free ration to 813.5 million Indians, or 58 per cent of the population, beyond December 2028 and keep expanding cash handouts — currently given to over 100 million farmers, more than 100 million women in 16 states, besides providing over 100 million subsidised LPG cylinders to women.

Surely, forcing most of the population to survive on doles can’t be the idea of Viksit Bharat@2047.

Coming soon: Pre-Budget look at trade and exports in Trump era