The capital markets, usually quite gung-ho about the Union government’s budgets, have not shown a similar enthusiasm this time. Of course, the international threat of global tariff wars, apart from one by US President Donald Trump on India, are dark clouds that capital markets can see. But domestically, the market’s lack of enthusiasm appears to be based on a number of reasons.
First, there seems to be little in the budget tax provisions on capital gains taxation. Second, the consumption boost to the middle class barely provides the incentive to invest in the capital markets. Third, the voter-driven personal income tax cuts for the middle class touches a tiny proportion of the workforce, while eating into the government’s tax revenues at a time when total debt to GDP (centre and states together) still runs at 82%, and interest burden on government borrowing has become a burden.
So can the capital expenditure envisaged in the budget elicit more formal sector job creation? Let us be clear that the Union Ministry of Finance’s Economic Survey 2025-26 claims’ about labor force participation rate (LFPR) and worker population ratio (WPR) rising and unemployment rate falling – are just that, claims.
The state of employment
The facts are as follows. In 2017-18, India had reached the highest unemployment rate in the history of labour surveys in India. The economy slowed over 9 quarters from 2017 to early 2020, and then Covid sent unemployment shooting up, as the economy contracted (by twice as much as the global economy in FY2021). Hence, 80 million workers went back to agriculture, reversing the exit from agriculture between 2004-2019. Thus, the LFPR rose, as did WPR, and UR fell, but only because women also joined agriculture, as unpaid family labour (40 million additional UFL). That is what the KLEMS researchers and the prime minister have called ‘8 crore new jobs in 4 years (2020-24)’. The Economic Survey admits real wages have not risen for 80% of workers in the last five years, but still claims jobs have grown – a rather contradictory conclusion.
Given this background, one would have expected that economic policy generally, and budgets post Covid in particular, would be designed to create non-farm jobs – given that aggregate demand collapsed in the economy – as macroeconomic aggregates have shown. However, the finance minister’s response, in the Budget 25-26 has been to give Personal Income Tax (PIT) breaks to the middle class, hoping to revive demand.
Also read: For Farmers, Women, the Poor and the Youth, Budget 2025-26 Offers Only Symbolic Changes
Given that the middle class itself has had to dis-save to maintain consumption, while consumption has barely grown, the tax breaks to 30 million PIT payers (in a workforce of 600 million) is hardly likely to turn around aggregate demand, let alone encourage the growth of private investment, which, by extension, would generate growth or jobs.
Budget at a glance shows total expenditure as a share of GDP is coming down each year since COVID, and the 2025-26 budget is expected to come down to 14.2% of GDP, as tax revenues fall. Yet, effective capital expenditure, which ranged from 2.6% to 2.9% of GDP for four years before Covid, consistently increased to 3.2% in the first year of Covid and is budgeted to reach 4.2% of GDP in 2025–26. This does indicate an improvement in the quality of expenditure. However, the cuts in PIT in Budget 25-26, following the cuts in Corporate Income Tax (CIT) in Budget 2019, have reduced government revenues even as GST continues to grow.
The question of job creation
Meanwhile, the schemes targeted towards employment generation in Budget 25-26 do not seem promising with respect to non-farm job creation.
The first scheme is the “enhancement of credit availability with guarantee cover”. This is supposed to improve access to credit. The credit guarantee cover will be enhanced for micro and small enterprises from Rs 5 crore to 10 crore, leading to additional credit of 1.5 lakh crore in the next 5 years.
The second scheme is to promote employment and entrepreneurship opportunities in labour-intensive sectors. Thus, the government will undertake a focus product scheme for the footwear and leather industry.
Finally, there is a scheme for tourism for employment-led growth. Top 50 tourist destination sites in the country will be developed in partnership with states through a ‘challenge mode’. Land for building key infrastructure will have to be provided by states and hotels in those destinations will be included in infrastructure. But these schemes are unlikely to set the labour market ablaze.
For a country that adds 6–7 million new job seekers each year, where 46% of the workforce in agriculture should exit farming, that has 100 million youth not in education, employment, or training, and about 25 million unemployed, these three budget schemes hardly seem capable of even beginning to address the challenges of job creation. And if the middle class tax cuts are not expected to raise consumption demand and hence investment, the needed rise in private investment is unlikely.
Santosh Mehrotra was Professor of Economics at Jawaharlal Nehru University, and is a Visiting Professor at the National Research University Higher School of Economics, Moscow.