NEW DELHI - India's government unveiled its annual budget on Saturday, slashing personal tax rates to boost domestic demand amid economic uncertainties. The world's fifth-largest economy anticipates its slowest growth rate in four years, with urban demand faltering and private investment remaining weak. High food inflation is also squeezing disposable incomes for millions.
The government's new budget introduces significant tax reforms, including raising the threshold for tax exemption to 1.28 million Indian rupees (approximately $14,800). Finance Minister Nirmala Sitharaman highlighted the move, stating, "The new structure will reduce taxes on the middle class and leave more money in their hands, boosting household consumption, savings and investment." This measure will cost the treasury around 1 trillion Indian rupees ($11.6 billion) but is expected to spur economic activity.
Despite these optimistic projections, challenges persist, with the country’s economy projected to grow between 6.3% and 6.8% next fiscal year - down from nearly 8% previously necessary to achieve developed nation status by 2047. Persistent food inflation and stagnant job growth are undermining consumer confidence. The Indian economy's per capita income is roughly $2,700, with one-third of the population classified as middle class.
The budget aims to stimulate growth across multiple sectors, especially agriculture and manufacturing. The government plans to launch initiatives to improve agricultural productivity, focusing on high-yield crops and increasing subsidized credit limits for farmers. The agricultural sector, still employing the majority of India’s workforce, is seen as pivotal for bolstering economic recovery.
Economists have voiced cautious optimism about the budget's potential. "The tax cuts are likely to spur consumer demand and savings for the middle class, which has faced challenges from elevated inflation and lower income growth," said Sakshi Gupta, economist at HDFC Bank. Following the announcement, consumer stocks, including those of Maruti Suzuki and Godrej Consumer Products, experienced gains of up to 8%.
Meanwhile, the government's projected fiscal deficit for 2025-26 stands at 4.4% of GDP, down from 4.8% this year. To manage this, the government plans to increase capital spending modestly to 11.21 trillion rupees. "Investment in infrastructure is necessary to support long-term growth, but many investors were disappointed by the modest increases outlined for this sector," noted analysts following the budget release.
Economic experts are also calling for structural reforms beyond immediate tax cuts, citing the need for improvements to land and labor laws to facilitate business operations and encourage investment. Chief Economic Adviser V Anantha Nageswaran emphasized these necessary reforms could mitigate potential risks from global trade uncertainties and commodity price fluctuations.
Inflation remains a pressing issue, with retail inflation at 5.2% as of December 2024, and food inflation at 8.39%, climbing higher due to increased vegetable prices. The economic survey submitted alongside the budget suggests food inflation may ease, influenced by seasonal factors and new crop arrivals. Yet, risks persist, especially from adverse weather events and rising international commodity prices.
Despite the challenges, the budget is aimed at igniting growth across various sectors. The government's long-term vision hinges on elevational investment from the current 31% to 35% of GDP. The International Monetary Fund (IMF) projects India to become a $5 trillion economy by FY28, highlighting the needs of both external pressures and domestic policy reforms to sustain this growth.
Analysts argue for balancing fiscal responsibility with growth measures, particularly as Modi's government seeks to maintain support from the middle class. Surveys suggest increasing disenchantment among citizens due to rising living costs, pushing the administration to act.
The government's financial strategies also extend to encouraging participation from young investors, who have significantly increased their presence in equity markets. IPO listings are claimed to have surged sixfold between FY13 and FY24, indicating growing capital formation driven largely by young demographics.
Going forward, experts highlight the need for cohesive policy frameworks and sustained focus on educational improvement, technology investment, and infrastructure speed to achieve ambitious growth targets. Sustainable growth is contingent upon the government’s ability to adapt to shifting dynamics, regulatory compliance costs, and payments to both corporate and non-corporate sectors.
The strict approach to economic growth outlined in this budget, as well as its focus on revising outdated regulatory measures and improving ease of doing business, are necessary steps. If executed effectively, they could position India on the path to achieving its goal of developed status by 2047. The performance of the middle class, especially under various economic conditions, will likely remain central to the overall growth narrative as India continues to navigate the complex waters of global economic change.