Context

• India’s Union Budget 2026–27 signals a decisive shift away from pandemic-era crisis management towards a borrowing-led development strategy anchored in public capex.
• By targeting a fiscal deficit of 4.3% of GDP and expanding public investment to ₹12.2 lakh crore, the government positions infrastructure spending as the central driver of long-term growth.
• This approach reflects confidence in India’s macroeconomic stability and reframes public investment and MSME support as permanent pillars rather than temporary stimulus.
• Yet, beneath this stability lies a growing tension between capital formation and employment outcomes.

Towards a Growth Doctrine

• For much of India’s post-independence history, capital expenditure expanded or contracted based on revenue conditions.
• That framework changed after 2020–21, when capex became the organising principle of fiscal policy.
• Its share in total expenditure rose from about 12% to over 22%, reflecting a strategic commitment to public investment-led expansion.
• The logic is familiar: public spending crowds in private investment, raises productivity, and generates jobs.
• However, labour indicators suggest that this transmission is weakening. Youth NEET rates (ages 15–29) remain between 23% and 25%, indicating that a significant share of young Indians remains outside education, employment, or training even as investment accelerates.
• Growth, while strong on aggregate, is no longer translating automatically into broad-based labour market participation.

A Structural U-Turn

• Sectoral employment trends reveal a deeper structural reversal. Construction, the sector most directly linked to infrastructure spending, has seen declining job intensity.
• Its employment elasticity fell from 0.59 in the pre-COVID period (2011–12 to 2019–20) to 0.42 in the post-COVID years (2021–22 to 2023–24).
• Record infrastructure spending is now associated with fewer jobs per unit of investment than in the past.
• The shift in agriculture is even more concerning. Instead of releasing labour as productivity rises elsewhere, the sector has begun reabsorbing workers.
• Employment elasticity jumped from 0.04 before COVID to 1.51 after, indicating distress-driven fallback into low-productivity activity.
• Together, these trends represent a structural U-turn: India is modernising its physical assets while its workforce drifts back toward subsistence.

Capital Intensity and Wage Divergence

• The employment shortfall is closely tied to the production structure reinforced by the capex turn. Public investment increasingly favours capital-intensive processes.
• While net value added per worker has risen, wages have lagged, creating a widening gap between productivity gains and labour income.
• These gains are largely captured as profits, rather than shared with workers.
• Industrial composition reinforces this bias. Most factories remain small and contribute modestly to output, while larger firms, better positioned to exploit new logistics and infrastructure, dominate value creation but generate limited employment.
• MSMEs, particularly in manufacturing, struggle to scale, compete, or integrate into capital-heavy supply chains.
• The outcome is a dual economy: a high-productivity, capital-driven upper tier that fuels headline GDP growth, and a vast lower tier that absorbs workers through informality, self-employment, and low-wage activity with weak income growth.

Conclusion

• Fiscal strategy and labour outcomes together suggest a reordering of priorities. Employment is increasingly treated as an indirect outcome of growth rather than a co-equal objective.
• Inclusion in the growth process depends on formal skills, urban location, and compatibility with automation.
• Those outside this profile adjust downward into informal or subsistence work. Even within the organised sector, wage growth remains muted.
• The economy continues to expand, but without broad absorption of labour. The central challenge ahead is not sustaining growth alone, but reshaping it to reduce inequality and reconnect capital accumulation with employment creation.