The Long Awaited Policy Response is Here

OVERVIEW

The employment, wages and consumption slowdown that has played out in India post-Covid has now been recognised by India’s policymakers. Whilst their policy response has been substantive (especially with regards to boosting consumption, the mainstay of India’s economic growth), the structural issue of helping middle class India deal with a massive labour market transition – away from salaried jobs to a gig economy – still remains. The consumption-centric economic model that has worked for India since 1991 is breaking down under the strain of tech advances. India has to build a new economic model and the journey to a new normal is likely to be painful.

“WASHINGTON, August 1, 2024—More than 100 countries—including China, India, Brazil, and South Africa—face serious obstacles that could hinder their efforts to become high-income countries in the next few decades, according to a new World Bank study that provides the first comprehensive roadmap to enable developing countries to escape the “middle-income trap.”

Drawing on lessons of the past 50 years, the World Development Report 2024 : The Middle Income Trap finds that as countries grow wealthier, they usually hit a “trap” at about 10% of annual U.S. GDP per person—the equivalent of $8,000 today. That’s in the middle of the range of what the World Bank classifies as “middle-income” countries. Since 1990, only 34 middle-income economies have managed to shift to high-income status—and more than a third of them were either beneficiaries of integration into the European Union, or of previously undiscovered oil.” – World Bank Group press release (source: https://www.worldbank.org/en/news/press-release/2024/07/22/-middle-income-trap-hinders-progress-in-108-developing-countries)

Retail Sales Light up Diwali 2025

Friday 17th October 2025 was the day before Dhanteras, the day on which millions of Indian households believe it is auspicious to buy jewellery. Across India’s big cities, traffic almost came to a standstill as shoppers spilled out of their homes and offices and into the streets and shopping malls of India. Such was India’s demand for silver leading up to Dhanteras in 2025 that the bullion markets in Mumbai, London and New York ran out of silver. The worldwide shortage of silver in turn created a price spike which took silver prices to levels never seen before.

MMTC Pamp – a joint venture between Switzerland based bullion specialist Pamp SA, and MMTC Ltd, a Government of India Undertaking – runs the only London Bullion Market accredited silver and gold refinery in India. Silver & gold bars from MMTC Pamp are usually in high demand because of their reputation for purity. However, Dhanteras 2025 was unusual even for MMTC Pamp. Vipin Raina, the Head of Trading at MMTC Pamp said “Most people who are dealing silver and silver coins, they’re literally out of stock because silver is not there….This kind of crazy market — where people are buying at these levels — I have not seen in my 27-year career.”

As the Indian market ran out of silver on the back of record demand, Indian jewellers turned to the London Bullion Market – via global banks like JP Morgan Chase – for supplies. Around a fortnight prior to Dhanteras, JPMorgan Chase & Co. — the largest precious metals trader and an important bullion supplier to the Indian market — told at least one of its clients that it had no more silver available to deliver to India for the month of October, and the soonest it could offer supplies was in November. (source: https://economictimes.indiatimes.com/industry/cons-products/fashion-/-cosmetics-/-jewellery/sold-out-in-india-panic-in-london-how-the-silver-market-broke)

By 9th October – a week prior to Dhanteras “the London silver market would be gripped by the biggest squeeze that any of the multiple traders Bloomberg spoke to had seen in their careers.” As banks like JP Morgan & Co stepped back from the frenzied market, bid-asks spread (the price gap between what sellers want to be paid versus what buyers are willing to pay) soared. As a result, trading became impossible. Effectively, India’s insatiable demand for silver had broken the world silver market.

Interestingly, it wasn’t just silver. Even car sales skyrocketed in the pre-Diwali and post-Navratri festive shopping season in 2025. Major automakers in India, including Maruti Suzuki, Hyundai Motor and Tata Motors, saw record Dhanteras sales. In fact, on Dhanteras (18th October 2025) India’s car showrooms sold over 100,000 passenger vehicles, a single day record for India.

So given the backdrop of stagnant wages, weak job creation and record levels of household indebtedness, what triggered this boom in spending on the eve of Diwali 2025? And how sustainable is this upsurge in spending?

Unwinding the fiscal transfers from the middle class to the elite

Income Tax collections from individuals rose from 2.5% of GDP in FY19 to 3.8% in FY25. GST collections as a % GDP rose from 2.5% in FY19 to 2.8% in FY25. Effectively, by FY25 Indian households were paying 1.6% of GDP more to the Exchequer each year (than they did in FY18). In absolute terms, the amount that Indians were paying as Income Tax went from Rs. 4.73 trillion in FY19 to Rs. 10.45 trillion in FY24, a CAGR of 17%.

Unfortunately for the Indian consumer, this increased fiscal load that she was bearing coincided with a conk-off in white collar job creation.

post-covid-sprut

This hike in income taxes was used to pay for an ambitious Government capex program which was in part necessitated by the collapse in the Indian economy in the wake of the first wave of Covid in 2020. However, the government capex wave continued through 2022, 2023 & 2024 i.e., long after Covid had abated. As a % of the Government of India’s total spending government capex went from 13% in FY19 to 21% in FY24. In absolute terms government spending on capex went from Rs. 3.1 trillion in FY19 to Rs. 9.5 trillion in FY24, a CAGR of 25%.

The biggest areas on which the Government expended its capex were roads, railways and defence. Between FY20-24, India grew its National Highways from 132K km to 146 km, a CAGR of 2.5%. The number of passenger trains ferrying Indians across India rose from 70K to 79K, a CAGR of 3%. The Indian Navy commissioned its second aircraft carrier, INS Vikrant in September 2022. In March 2025, contracts worth ₹62,700 crore were signed by the Air Force for 156 Prachand Light Combat Helicopters. In 2024, the Army began taking delivery of the T-90S Bhishma tanks which were out licensed from the Russians and manufactured at the Heavy Vehicles Factory in Chennai. (source: https://en.wikipedia.org/wiki/List_of_equipment_of_the_Indian_Army).

And yet for all the impressive strides made on the back of this record surge in government capex, spillover benefits for the broader economy were hard to spot. Specifically, much of the Government capex went into capital intensive activities such rail and defence manufacturing. Even road construction in India has steadily become more capital intensive over the past decade; compared to a decade ago, if you see a highway construction team in India today, it has only 1/5th number of people it had a decade ago thanks to the use of advanced road construction machines which facilitate road construction at a rapid rate.

The capital intensive nature of government capex meant that middle class job creation was NOT meaningfully boosted by the record surge in government capex. Instead, the extra taxes which were being taken from the middle classes to pay for this government capex, jammed consumption growth in India. As a result, the rise in income taxes and the rise in government capex neatly offset each other (at around 1.6% of GDP) without really moving the overall economy forward.

Beginning with the Union Budget on 1st February 2025, the Government of Indian began unwinding these transfers and so thus began stimulating consumption. The Union Budget for FY26 said that those earning less than Rs. 12 lakhs per annum no longer have to pay Income Tax. This amounts to a Rs. 1 trillion per annum stimulus.

Secondly, the RBI also took notice of the conk-off in jobs and consumption and began playing its part in reviving the economy. The four repo rate cuts which the RBI has expedited so far are likely to reduce Indian households’ annual outgo on interest payments by Rs. 1.6 trillion. [~Rs. 150 trillion household debt outstanding (household debt as a % of GDP is ~42%) multiplied by 1% cut in interest rate].

Thirdly, in a policy measure billed as GST 2.0, the Government of India with great fanfare cut GST on certain items on 22nd September 2025. This amounted to a Rs. 2 trillion per annum stimulus according to our calculations. [This Rs 2 trillion per annum figure is arrived at using FY25 GST collections of about Rs. 22 tn. With collections for all the categories that have either witnessed a tax rate reduction or rise, adjusted for impact of cess and foregone input tax credit benefit, the total cut comes to ~Rs. 2 tn, something which was also confirmed by the Finance Minister].

This three stimuli – adding up to Rs 4.6 trillion (US$50bn or 1.5% of GDP) – played a significant role in creating the consumer spending upsurge between Navratri and Diwali in 2025. To sustain this upsurge, those who manage India’s economy are likely to not only use more interest rate cuts and tax cuts but also try to plug other sources of leakages in Indian consumer spending.

Unwinding the gambling disaster

In August 2025, India’s IT Minister, Ashwini Vaishnaw said online money games had harmed 450 million Indians, causing losses of over Rs 200bn (US$2.2 bn) rupees and triggering “depression and suicides” among many. (source: https://www.bbc.com/news/articles/cyvnlmde7dzo) Our estimates suggest that Indians were spending Rs 70K crores (US$8 bn) per annum of online money games (OMG) (1). On 1st October 2025, the Government of India banned OMG thus pushing the Rs 0.7 trillion (US$8 bn) per annum back into consumption and away from gambling. (source: https://www.thehindu.com/business/real-money-gaming-ban.)

Furthermore, F&O trading facilitates transfer of wealth from middle class retail investors in India’s smaller towns & cities to large, well-capitalised and well informed institutional investors and stockbrokers. In light of the government’s newly discovered zeal to crackdown on gambling activities which redirect monies away from productive consumption into transfers from the middle class to the elite, we are hopeful that SEBI might announce regulatory changes which reduce the amount of F&O trading in India. Basis the document that published a year before the SEBI vs Jane Street showdown, it appears that India’s retail F&O trader were being impoverished to the tune of Rs. 1 trillion per annum in the F&O market. If these transfers of wealth from the middle class to the elite (both in India and in New York) can be reduced then those monies could be channelled into productive consumption in India. (2)

(1) The Government has said that banning online games will create a ~Rs. 20K cr hit to the Exchequer, of which Rs.16.5K GST taxed at 28% rate and Rs. 3.5K TDS taxed at 30% suggests Rs. 71k cr of annual spend on gambling by participants.

(2) The maths on the Rs 1 trillion annually lost by retail investors in the F&O market is 9 million investors are participating in this market, and, on average, each is losing Rs 1.1 lakhs per annum. Multiple studies from SEBI have underscored these numbers.

Adding the Rs 1.7 trillion of consumption boost from the potential redirection of spends related to gambling & speculation into productive consumption boosts the overall consumption stimulus to Rs 6.3 trillion or nearly 1.8% of GDP from H2 FY26 onwards. Note that our 1.8% of GDP estimate (of the stimuli being imparted) broadly offsets the 1.6% extra tax load that the Exchequer had imposed on the Indian consumer since FY19.

Politics and Economics clash in India’s democracy

Whilst the stimuli highlighted above will give a short term sugar rush to the Indian economy, the odds are high that without further measures to stoke consumption (e.g., further interest rate cuts and more income tax cuts), 2-3 quarters out, consumption and therefore profit growth will once again slowdown in India. There are two reasons for this:

AI related job losses are likely to be extensive: we are in the early stages of the AI related job losses in India. Whilst Western tech giants (such as Google and Microsoft) and Western IT services firms (such as Accenture) have been candid that AI will lead to large scale job losses in their firms , Indian IT firms, Financial Services firms and Media companies have been more coy on the subject. Privately, however, the CEOs of these Indian firms tell us that anywhere between a fifth to a third of their workforce will gradually be eased out as they replace call centres, underwriting teams, HR professionals, coders research analysts and even marketing professionals with AI. These IT firms, Financial Services firms and Media companies are some of India’s most profitable companies and their profits are growing in double digits. However, given that cost of capital is low for them, it makes sense for these firms to replace labour with capital. In other words, it makes sense for them to invest in AI today to reduce their headcount costs for the next several years.

Lack of knowhow, both scientific and economic: India’s governance apparatus is designed to address the problems of low income people, not middle income people. The average annual earnings of India’s income tax payers whose salary ranges from Rs 5 lakhs – Rs 1 crores is Rs 22 lakhs or $25K. That makes middle class India a second world country like Portugal ($29K per capita income) or South Korea ($33K per capita income). Neither our polity nor our policymakers have experience of dealing with the challenges that second world countries face, challenges such as creating a high quality university education system, creating incentives for companies to do R&D and generate new knowledge.

No country is able to grow decade after decade using the same economic model. An economic model which works well for a low income country (e.g., labour intensive exports manufactured in sweatshops and exported to the West) does not work for the same country as it gets richer (e.g., the Asian crisis of 1997 which was triggered by a currency crisis for South East Asian economies like Thailand, Malaysia and Indonesia). Once an emerging economy hits such a speedbump – also known as the “Middle Income Trap” which often hits emerging economies as their GDP per capita starts approaching $8K – retooling the economic model and reviving growth tends to be a multi-year repair job.

India is not the first emerging economy to hit such a speedbump. As the World Bank’s Chief Economist Indermit Gill says, “…too many of these countries rely on outmoded strategies to become advanced economies. They depend just on investment for too long—or they switch prematurely to innovation. A fresh approach is needed: first focus on investment; then add an emphasis on infusion of new technologies from abroad; and, finally, adopt a three-pronged strategy that balances investment, infusion, and innovation. With growing demographic, ecological and geopolitical pressures, there is no room for error.” (source: https://www.worldbank.org/en/news/press-release/2024/07/22/-middle-income-trap-hinders-progress-in-108-developing-countries)

The consumption-oriented economic model that has served India well since 1991 is breaking down as the middle class finds itself caught in the maws of tech driven economic change. Transitioning the Indian economy from salary-driven consumption model to a gig economy driven model will take 2-3 years. Whilst the free market is likely to facilitate such a transition, the government needs to get out of the way by reducing the many layers of red tape which hold down small businesses.

Nandita Rajhansa and Saurabh Mukherjea work for Marcellus Investment Managers (www.marcellus.in). The views and opinions expressed in this material are those of the writers/authors and do not necessarily reflect the official policy. This material is for informational and educational purposes only and should not be considered as financial, investment, or other professional advice.

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The Long Awaited Policy Response is Here