On Tuesday, Indian Prime Minister Narendra Modi’s coalition government will present its first federal budget after a narrow election victory.

A weakened Modi, who is dependent on coalition partners for the first time, is expected to review his spending policies but maintain a prudent fiscal stance.

Analysts say the new government may need to focus more on the rural majority, which benefits less from the country’s fast-growing GDP than the rich.

The fact that this is Modi’s third term will keep him occupied with the idea of ​​leaving a lasting legacy and may prompt him to do something about economic prosperity for the masses, says Rathin Roy, a former member of the prime minister’s Economic Advisory Council.

“It is the one area where his legacy will show that he has failed conspicuously in the past.”

In his 10 years in power, Mr Modi has poured billions of dollars into state-funded infrastructure, building sea bridges and highways. He has also cut taxes for big business and launched subsidy schemes to encourage export-oriented manufacturing.

India’s shaky macro economy has stabilised and stock markets have risen.

But this also applies to inequality and problems in rural areas.

BMW cars achieved their highest sales figures ever in the first half of this year, while overall consumption growth was the slowest in two decades.

Wages are stagnating, household savings are falling and well-paying jobs remain out of reach for most Indians.

India’s regional imbalances are also glaring. A majority of the country lives in northern and eastern India, where per capita income is lower than Nepal’s, and health, mortality and life expectancy are worse than Burkina Faso, Mr. Roy said.

Nine in 10 economists now say chronic unemployment is the biggest challenge facing Modi 3.0. A post-election survey found that seven in 10 Indians favor taxing the super-rich, and eight in 10 economists believe growth has not been inclusive.

Travelling through the agricultural heartland of Northern India, you will see that the plight of the rural population stands in stark contrast to that of those living in the cities.

Muzaffarnagar in the northern state of Uttar Pradesh is just a few hours’ drive from India’s capital Delhi. Apart from the ultra-modern highway that cuts through the vast open fields, it feels like a region largely bypassed by the country’s glittering economic boom.

Sushil Pal’s family has been farming the plains of Behra Asa village for generations. It’s hard work that hardly pays off anymore, he told the BBC.

Mr. Pal did not vote for Mr. Modi’s party this time, despite supporting it in the previous two elections. The prime minister’s promise to double farm incomes, he says, has remained just that: a promise.

“My income has gone down. The cost of inputs and labor has gone up, but not for my crop,” Mr. Pal said. “They only marginally increased the purchase price of sugarcane before the elections.

“All the money I earn goes to pay school and college fees for my sons. One of them is an engineer but has not had a job for two years,” he said.

An export-focused furniture maker has seen its sales fall by 80% over the past five years as global orders dried up after a post-Covid sales spike.

Rajneesh Tyagi, the owner, said he would have liked to sell his products locally to ease the economic malaise abroad, but due to ongoing problems in rural areas, there is no demand for his products.

“The agricultural economy is in decline and the biggest problem in growing local demand is the high debt among farmers and unemployment,” he added. “They have no capacity to buy anything.”

Mr. Tyagi’s enterprise represents a broad universe of micro-enterprises that form the backbone of the Indian economy. India Ratings, a credit rating agency, estimates that 6.3 million enterprises have closed between 2015 and 2023, costing 16 million informal jobs.

In contrast, profits at India’s 5,000 listed companies rose as much as 187% between 2018 and 2023, partly due to tax cuts, commentator Vivek Kaul said.

Bridging the vast gap between the formal and informal parts of the economy and bringing prosperity to India’s villages are the biggest challenges facing Modi as he enters his third term.

Goldman Sachs economists wrote in a note that his first post-election budget may represent a “tilt” toward a welfare state, but not necessarily a shift away from more capital spending on big infrastructure projects.

A larger-than-expected central bank dividend payout (0.3% of GDP) will allow the government to increase social spending and maintain capital investment, with a focus on the rural economy and job creation, the Wall Street bank said.

Even those who manage money for India’s richest people agree with this view.

Rajesh Saluja, CEO and Managing Director of ASK Private Wealth, says poverty reduction is most likely to be on the government’s fiscal agenda and this can be done “without upsetting fiscal calculations” given high revenues and tax revenues.

But economists warn that more cash handouts are a poor substitute for genuine reform-led development. About 800 million Indians already live on free grain, and some states spend nearly 10% of their revenues on welfare schemes.

The budget should outline a vision of how the government wants to get millions of people into the labor market and create earning potential.

“The reduced footprint of the unorganised sector has implications for employment generation. Therefore, a sensible mix of policies needs to be pursued in the meantime that allows for coexistence of both formal and informal sectors,” said Sunil Kumar Sinha, chief economist at India Ratings.

India should also boost low-cost, labour-intensive manufacturing in sectors such as textiles and agri-food processing to meet the huge domestic demand, Roy said.

Economists at India’s largest bank, SBI, have proposed extending the production-linked incentives that Modi has offered to export-oriented sectors to small businesses.

“Up until now, when we think about manufacturing, we think about fancy people. We think about supercomputers. We think about bringing Apple here and making some iPhones,” Mr. Roy said.

“These are not things that 70% of the Indian population consumes. We should be producing in India what 70% of the Indian population wants to consume. If I can make 200-rupee ($2.4, £1.8) shirts in this country and not have that import demand leak to Bangladesh and Vietnam, that will boost production.”