Budget 2025 preview—Part 2: IT hiring amid AI, internal migration, pensions

Internal migration: The North and the South need each other

It’s natural for people to move from low-income regions to high-income regions in search of better economic opportunities. In 2023-24, the per capita income of the five southern states—Tamil Nadu, Andhra Pradesh, Karnataka, Telangana and Kerala—was 2.3-5.8 times that of Uttar Pradesh, Bihar and Jharkhand (See chart). India’s Census 2021 is delayed. So, we don’t know how many people have migrated to the southern states, but anecdotal evidence suggests a significant movement.

For the southern states, it's an economic necessity to draw people to come and work there. The fertility rate—average number of children a woman is expected to have during her lifetime—of southern states is much lower than the all-India replacement rate (the fertility rate that sustains population levels) of 2.1 children per woman. As people live longer and fewer babies are born, the working-age population of southern states will decline.

By comparison, Uttar Pradesh, Bihar, and Jharkhand have fertility rates higher than the all-India replacement rate. They are also economically backward and are thus unlikely to face the same workforce crunch. Managing this internal migration will influence India’s economic pathways, as high-growth centres are located in the southern states and will continue to do so for some period of time.

IT hiring: Reinvent to stay relevant in the age of AI

Alarm bells rang in 2024 when Nasscom, an IT industry grouping, estimated the sector added only 60,000 jobs in 2023-24—the lowest annual addition in the last five years (Chart 1). Lower technology spending due to a slowing global economy and the threat of artificial intelligence (AI) were the two major reasons cited for the slowdown.

The IT sector is important to India for several reasons. One, as of March 2024, it employed around 5.5 million. Two, every direct employment in the sector potentially creates 2.5 indirect jobs. Three, it is the mainstay of Indian services exports. As of 2023-24, the sector’s export revenues amounted to 7% of India’s gross domestic product (GDP) and covered nearly 80% of the trade deficit (exports minus imports) on the goods side.

Also read: How India’s services sector made history as goods exports floundered

How the sector responds to a fast-changing environment, where more clients are diverting their tech spends towards AI, is crucial to India’s growth prospects. A bright spot in 2023 was 109 multinationals setting up their global capability centres in India, taking the total to around 1,700. Can tech companies reinvent themselves and stay on the high-growth curve?

Pensions: The financial burden of retirement

As of March 2024, there were 6.5 million central government pensioners, about 30% more than the current count of central government employees. In 2022-23, the Centre directed about 5.8% of its total spending towards their pensions. In 2024-25, it expects to spend 5%.

That is a significant amount in the context of the government’s overall spending. In 2024, the government did a U-turn on a system it implemented in 2004, which shifted the pension onus from itself to employees and committed more. With people living longer, this is one expense that is likely to persist.

Also read: Will the government be able to meet its capex target for FY25?

States face an even greater predicament. Their combined pensions bill was about twice that of the Centre, accounting for about 12% of their combined expenditure. This is a non-negotiable expense. And it means they have that much less to spend to create capital assets or fund targeted schemes for the needy.