Budget: Tax relief for Indian middle class - but will it boost economy?
2025-02-01
Category: news

Indian Prime Minister Narendra Modi's coalition government has unveiled its first full-year budget after his party lost an outright majority in parliament last year.Finance minister Nirmala Sitharaman announced measures to counter slowing growth, rising prices and flagging consumption among the middle class in Asia's third-largest economy.After a period of world-beating growth of more than 8%, India is set for its slowest economic expansion in four years as stagnant wages and high food prices hit consumer spending and corporate profits.Here are five key takeaways from India's union budget:
Tax cuts for the middle class
In a major relief to millions of taxpayers, the government has raised income tax exemption limits, making earnings of up to 1.2m rupees ($13,841; £11,165) - excluding special rate income like capital gains - entirely tax free.The finance minister has also announced tweaks to other income tax slabs which is likely to leave more money in the hands of the middle class.The income tax concessions to the middle class "seems aimed at addressing the slump in urban consumption", said Nomura's India Economist Aurodeep Nandi.The impact, however, could be limited since a tiny fraction of Indians pay direct taxes. In 2023, 1.6% of Indians (22.4 million people) actually paid income taxes, according to data presented in parliament.The market cheered the announcements with stocks of automobiles, consumer goods and online grocery companies rallying.
State-led infrastructure spending remains on track
State-funded capital expenditure on major road, port and railway projects has been a key driver of India's growth engine since 2020.Despite an unexpected contraction in actual spending in the first nine months of this year, the government has modestly increased its infrastructure expenditure target for this year from 11.1 trillion to 11.2 trillion rupees ($129.18bn; £104.21bn).The government has also proposed offering interest-free loans to states to enable them to spend more on infrastructure development.
Boost for nuclear energy, insurance
The budget has set a goal to generate 100GW of nuclear energy by 2047. As part of this plan, a Nuclear Energy Mission has been launched with a budget of 200bn rupees ($2.3bn, £1.86bn). The plan is to deploy five indigenous reactors by 2033 and amend laws, like the Civil Liability for Nuclear Damage Act, to realise goals and get more private sector participation in the sector.Meanwhile, foreign direct investment limits for the insurance sector have been increased from 74% to 100%."This will aid foreign insurers' interest in investing in the growing Indian insurance market, where we expect strong premium growth to boost profitability," said Mohammed Ali Londe, Senior analyst at Moody's Ratings.
Small-scale industries and regulatory reform in  focus
In order to ease the climate for doing business, which has been a major concern among investors, a high-level committee has been announced to undertake regulatory reforms in the non-financial sectors and reduce the compliance burden on corporations. The panel will make recommendations within a year.Small and micro industries, that account for 35% of India's manufacturing and create millions of jobs, also got a boost through fiscal support of 1.5 trillion rupees ($17.31bn; £13.96bn) over the next five years.The government has also raised production-linked subsidies and slashed import duties for local manufacturing units across sectors like textiles, mobile telephones and electronics. This could promote private investments, which have not picked up post the Covid-19 pandemic.
Balancing the fiscal math
Even with slightly higher budget outlays for infrastructure creation, India has had to continue a delicate balancing act between pushing economic growth and keeping its spending in check.The budget has reiterated a commitment to reducing the government's deficit, which is the gap between what it earns and spends, to 4.4% by 2026 from 4.8% this year.Global rating agencies closely watch these numbers, with lower debt figures leading to potentially better investment ratings in the future and a reduction in borrowing costs for the country.India's recent slowdown has made the growth versus fiscal prudence trade-off increasingly challenging.A recent economic survey by the finance ministry expects GDP growth to slow to between 6.3-6.8% in the financial year ending March 2026, in line with the Reserve Bank of India's forecasts.With the budget out of the picture, the focus will now shift to the central bank's monetary policy meeting later this month.The RBI has maintained policy rates at 6.5% since February 2023, but is likely to begin easing the cost of borrowing as both growth and inflation have begun to come down.Last week, the central bank announced plans to inject $18bn into the domestic banking system to ease a cash shortage, a move seen by many as a precursor to rate cuts.Follow BBC News India on Instagram, YouTube, Twitter and Facebook.