India’s economic growth has long been a cornerstone of optimism, buoyed by strong domestic demand, a dynamic workforce, and a robust services sector. However, recent data points to early signs of strain, raising critical questions about the sustainability of this growth trajectory. While manufacturing shows resilience with an increase in output and new orders, the services sector, the mainstay of India’s economy, appears to be faltering. In January, India’s business activity expanded at its slowest pace in over a year. Though growth remains robust by global standards, the cooling of domestic demand in the services sector signals a pressing concern. Services firms recorded their weakest new sales growth in 14 months, even as manufacturers witnessed resurgence.

This divergence underlines the growing complexities within India’s economic landscape. Manufacturing’s performance is encouraging. Strong domestic orders and a rebound in exports highlight the sector’s adaptability and its role in bolstering India’s global trade position. However, the uneven growth between manufacturing and services reflects a deeper structural imbalance. The services sector accounts for the lion’s share of India’s GDP and employment. A slowdown here has wider implications, particularly for consumption-driven growth. This emerging dichotomy between sectors adds an extra layer of importance to today’s Union Budget. Policymakers must seize this opportunity to address these imbalances through targeted fiscal measures. Announcements aimed at boosting consumption, especially in services, while incentivising investments in infrastructure and digitalisation, could provide much-needed relief.

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Similarly, reforms to strengthen ease of doing business and reduce compliance costs for service firms could reinvigorate domestic demand. Another critical factor is inflation. While manufacturers benefited from easing cost pressures, services firms experienced their highest cost inflation since August 2023. This discrepancy indicates that rising prices are being passed on to consumers, potentially dampening household spending and deepening the challenges for the sector. Persistent inflation, combined with a weaker currency, could also limit the Reserve Bank of India’s ability to adopt a more accommodative monetary policy. Amid these challenges, there are glimmers of hope. Job creation reached an all-time high, reflecting a strong labour market.

However, quality job creation remains a challenge for policymakers. Without consistent opportunities across sectors, particularly in services, economic growth risks becoming uneven and exclusionary. Strengthening infrastructure for the services sector is equally vital. Investments in technology, skill development, and digital infrastructure can help services firms enhance efficiency and competitiveness. This is especially critical as global demand improves, offering an opportunity for Indian businesses to expand their footprint in international markets. India’s growth story remains one of resilience and promise, but complacency could erode its hard earned gains. Bridging the gap between manufacturing and services, while ensuring price stability, is critical for sustaining long-term growth. On Budget Day today, policymakers must act decisively to address these vulnerabilities and chart a path for inclusive and balanced growth. There are many aspirations for the Finance Minister to meet.