30 Under 30 2025

Budget 2025: Government unleashes IT relief cannonball to aid consumption; there's little else for growth

Stock markets remain sluggish, eyeing future RBI proposed rate cut action

Salil Panchal
Published: Feb 1, 2025 06:35:47 PM IST
Updated: Feb 1, 2025 06:36:12 PM IST

File Photo: Shoppers walk inside a shopping mall in New Delhi. Image: REUTERS/Anushree FadnavisFile Photo: Shoppers walk inside a shopping mall in New Delhi. Image: REUTERS/Anushree Fadnavis

Finance Minister Nirmala Sitharaman saved the best of the policy measures for last, announcing a boost for the middle class in the form of zero income tax payment for up to an income of Rs12 lakh annually (under the new tax regime), signalling a move to consume and spend more now that they will have more income in their hands.

The assumption we are making here is that those earnings below Rs12 lakh annually were paying taxes. Also, the universe of taxpayers in India is still small.

The announcement of the tax relief drew cheers of “Modi, Modi” from parliamentarians from the Bharatiya Janata Party, but the finer print suggests that little else has been done: Whether it be employment generation, job creation and the ability for small businesses to grow rapidly.

Consumption demand in India remains weak and GDP growth for the third quarter ended December 2024 is forecast around 6.4 percent, its slowest in four years. Employment generation is an area where the Modi-led government has come in for criticism over the years and Sitharaman decided to tackle this issue by incentivising new hiring.

Also read: Why did stock markets get cold feet after the Budget?

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While ensuring that savings in tax will flow towards spending and savings for households, there is no quick fix to boosting consumption demand in India, which is at a several-year low. 

Bijal Ajinkya, partner, Khaitan & Co, says: “A bold assumption that taxpayers earning below Rs12 lakh per annum were paying taxes. Only those who suffer tax deduction at source and are engaged in more organised sectors would be paying taxes at those income levels. Hopefully tax savings are routed into savings across asset classes and not into consumption which works opposite to the government’s target of increasing consumption spend to fuel the economy.”

UBS India economist Tanvee Gupta Jain tells Forbes India: “The government has stuck to its promise of bringing down the fiscal deficit to 4.4 percent by FY26. The pace of fiscal consolidation has slowed. It is expected to be 40 bps in FY26 and it was 400 bps in the past four years.

We believe the Budget played a balancing act to boost near-term growth (gradual fiscal consolidation with focus on consumption) and also laid down the economic framework to boost India's medium-term growth (focus on improving ease of doing business, deregulation, 100 percent FDI in insurance, among others). 

While there is a boost to urban consumption and rural housing, the private capex increase has been largely muted. She said India’s domestic growth slowdown in H1FY25 was cyclical and partly policy-driven.

Sitharaman announced an increase in the credit guarantee cover for MSMEs to improve credit access and customised credit cards with Rs5 lakh limit for micro-enterprises.

Also read: FM's balancing act: Consumption boost and fiscal prudence

A boost towards the AI (artificial intelligence) ecosystem is the creation of three centres of excellence for AI with an investment of Rs500 crore. An investment of Rs10,000 crore fund of funds has also been proposed for startups.

A focussed incentive to promote 50 tourist destinations in India has also been announced. All of these measures will take time to yield jobs and incomes.

Indian equities echoed the conservative mood of investors, who continue to reel under pressure from falling stock prices over the past five months, led by a sell-off from foreign investors. The Nifty 50 closed flat at 23,482.15 points and is down 1,528 points or 6 percent in the past six months.

Investors will now eye the RBI’s monetary policy move on February 7—where a 25 bps rate cut is expected—and the commentary for growth, besides, of course, GDP growth data in India and corporate earnings growth in the coming quarters.

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