Nirmala Sitharaman’s Budget 2025 puts the middle class first—but will tax cuts truly drive consumption?

DID THE MAHA KUMBH Mela serve as an inspiration to the Budget team of the Union finance ministry? Just like paying obeisance to the confluence of the three holy rivers at Kumbh absolves humankind of its transgressions, Budget 2025-26 tries to offer reverence to three macroeconomic fundamentals — demand/growth push with tax cuts to the middle class, debt curtailment, and adhering to fiscal prudence — in an effort towards liberating the economy from the macro challenges.

But first things first. The vast multitude of India’s middle class — an economic powerhouse in itself — has finally got a shot in the arm in the form of a mega tax relief from Prime Minister Narendra Modi’s team. In her Budget speech, as finance minister Nirmala Sitharaman announced making annual income up to ₹12 lakh tax-free, the treasury benches of the Lok Sabha resonated with loud thumps, with Modi, too, joining the exhilaration of the ruling party MPs, with a visage reflecting confidence and vigour.

The move, according to the Central Board of Direct Taxes (CBDT), will make 15 million taxpayers in the ₹7-12 lakh income bracket free of any tax liability. “As a result of the proposal, revenue of ₹1 lakh crore in direct taxes will be foregone,” Sitharaman said in her Budget speech.

With that being the quantum of cash flowing into the economy after the tax break, consumption stocks gave a thumbs up to the move in the days following the Budget. The housing counter buzzed as well, while liquor stocks, too, added fizz to the tax cut party.

Banking on consumption

Even though the tax move is largely expected to bolster growth from the demand and consumption sides, finance secretary Tuhin Kanta Pandey, who is also the revenue secretary, is of the view that irrespective of the end-use by taxpayers, it will benefit the economy. “We expect money saved with the tax cut to come back to the economy in the form of consumption, savings, or investments,” Pandey said during the post-Budget press conference.

“Whether citizens save or consume these funds, both outcomes benefit the economy — savings strengthen bank liquidity, while consumption benefits spread across industries,” Pandey explained during a post-Budget interaction with industry body Ficci.

Experts see benefits accruing to FMCG, consumer durables and two-wheeler companies. “The proposed changes to the personal income tax slab rate under the new regime will enhance discretionary income and boost spending opportunities for consumers in sectors such as FMCG, textiles, consumer durables and automobiles, especially two-wheelers. Overall, the tax cuts will enhance financial flexibility of consumers and can benefit sales growth of consumer-oriented sectors,” says Anuj Sethi, senior director, CRISIL Ratings.

Managing Debt, Deficit

The Budget has also tried to address sovereign debt concerns. “Sans any major macroeconomic disruptive exogenous shock(s), and while keeping in mind potential growth trends and emergent development needs, the government would endeavour to keep fiscal deficit in each year (from FY27 to FY31) such that the Central government debt is on a declining path,” said the fiscal policy statement tabled along with the Budget, adding that the government will try to attain a debt to GDP level of about 50% (+/-1%) by March 31, 2031.

Finally, in what could be seen as the finance ministry’s ultimate reverence to the cardinal aspect of the holy confluence of the macro fundamentals, the mega tax dole has been provided without disturbing the fiscal fabric of the economy. Fiscal deficit in Budget 2025–26 has been pegged at 4.4%, a notch below the targeted 4.5%, according to the glide path decided in Budget 2021-22. In fact, the government has bettered FY25’s Budget Estimates of 4.9% — the Revised Estimates peg it at 4.8%.

Tax relief touches all: Sitharaman

With the macro fundamentals in place, the tax benefit has been designed in a way that it benefits all categories of taxpayers, the government underlines. The finance minister said tax rates have been brought down for every category of taxpayer, including those in the highest tax slab with a view to putting more money in the hands of the people.

Addressing the industry at the ‘Open House with FM’ event in New Delhi on February 3, Sitharaman said, “If one does the calculation, I am confident that what one is paying today is far higher than what he will be paying from April 1.”

Sitharaman went on to say that the rates have been brought down for every income band. “We have consciously designed it in a way that every taxpayer will have something more in his hand,” she said.

CBDT explains tax benefits

According to the proposed tax structure, the 30% tax rate will kick in on income of more than ₹24 lakh, compared with income above ₹15 lakh in the current slabs under the new regime.

Those earning an annual income of up to ₹12.75 lakh will not be liable to pay any tax, considering the standard deduction benefit of ₹75,000. CBDT, the apex direct tax policy body, has compiled data for benefits under various slabs. According to the CBDT, with the proposed slabs, the savings that will accrue to those earning between ₹13 lakh and ₹50 lakh is in the range of ₹25,000 to ₹1.1 lakh.

CBDT Chairman Ravi Agrawal says the move comes as a huge reprieve to the middle class. “As per the existing slabs, tax obligation on income of ₹12 lakh was about ₹80,000. It is a substantial percentage of the annual income. So, with that thought in mind, the threshold of ₹12 lakh was kept,” he tells Fortune India. He adds that the tax benefit is not confined to those with income up to ₹12 lakh. Benefits have been extended across slabs.

“Till ₹24 lakh, the tax slab is less than 30%... Maximum tax slab does not apply till income of ₹2 lakh per month. [The] salaried class earning up to ₹2 lakh... per month will now get benefit of a lower tax slab,” says Agrawal, adding that he expects almost 100% of the taxpayers to move to the new tax regime.

The capex story

In fact, one may argue that the giving away of ₹1 lakh crore in the form of tax receipts has been ensured by shaving off the allocation to capex. The annual capex growth rate, seen after the pandemic, has waned, and with the Budget Estimates of ₹11.21 lakh crore for FY26, allocation is almost flat compared with ₹11.11 lakh crore allocated in the previous fiscal.

The current fiscal’s capex utilisation, too, has remained tepid. The Revised Estimates for FY25 exhibit poor utilisation on the ground by the ministries concerned. “The government revised FY25 capital expenditure to ₹10.18 lakh crore, down from ₹11.11 lakh crore. This year, the finance minister is pushing the states to take the onus of building infrastructure,” says Rumki Majumdar, economist, Deloitte India, adding that Sitharaman has announced an outlay of ₹1.5 lakh crore for 50-year interest-free loans to states for capex and infrastructure.

Meanwhile, the allocation to highways has gone up marginally, while the allocation to railways remains flat. Allocation to railways for FY26 remains unchanged at ₹2.52 lakh crore, while the capex allocation to highways has been enhanced to ₹2,87,333 crore, up 5.5% from ₹2.72 lakh crore allocated in FY25. The states, meanwhile, have been given support for infrastructure.

Infra PPP

A significant announcement in this Budget is the push towards public-private partnership (PPP). It may signal a shift in stance from large-scale fiscal support to infrastructure, which has been the trend since the pandemic, to more private sector participation in the sector.

“Each infrastructure-related ministry will come up with a three-year pipeline of projects that can be implemented in PPP mode. States will also be encouraged to do so and can seek support from the IIPDF (India Infrastructure Project Development Fund) scheme to prepare PPP proposals,” Sitharaman said in her Budget speech.

Experts say that only time will tell how soon the ministry of highways will revive the erstwhile models like BoT (Toll) and if the railways will go back to innovative ideas like private trains like it did in 2021 but later shelved.

Government explains capex stand

Expenditure secretary Manoj Govil tells Fortune India that allocation to capex in Budget 2025-26 is up 17% over the Revised Estimates for the current fiscal, taking into consideration the Central outlay and the revenue grants to the state governments for spending on infrastructure. Govil says the hike is “handsome” and expecting an annual increment of 25-30% in the Central capex, which was a post–Covid strategy to uplift the economy, is “unrealistic”.

“There are two parts to the capital expenditure. One is the direct capex done by the Central government. Another is revenue grants given to the state governments for infrastructure spending. If you take them together, the Revised Estimates for this year is ₹13.18 lakh crore. In the next year, it is going up to ₹15.48 lakh crore, which is a growth of 17%,” Govil says.

Govil explains that capex in the economy was a post-Covid necessity, but since there is a fiscal glide path to abide by, there is only so much room for spending on infrastructure. “So, we have to get the historical context right. Fiscal deficit used to be around 4.6% during the pre-Covid times. When Covid struck, government revenues were affected. There was a need to support various sectors of the economy. With liberal spending, fiscal deficit went on to 9.2% in the first year of the pandemic in 2020-21, which was not sustainable and not in line with the FRBM requirements,” he says.

Agri, EV, Deregulation

Apart from the mega macroeconomic moves, Budget 2025-26 has taken significant steps that will go a long way in hand-holding specific segments of the economy, like agriculture, startups, the electric vehicles (EV) ecosystem, manufacturing, MSMEs, and overall ease of doing business.

On ease of doing business, the finance minister announced a high-level committee for regulatory reforms to review all non-financial sector regulations. On agriculture, she announced the ‘Prime Minister Dhan-Dhanya Krishi Yojana’ in partnership with states to cover 100 districts with low productivity, moderate crop intensity, and below-average credit parameters.

In a major push towards making EVs and mobile phones more affordable, 35 additional capital goods for EV battery manufacturing, and 28 additional capital goods for mobile phone battery manufacturing have been added to the list of capital goods exempted from basic customs duty. “This will boost domestic manufacture of lithium-ion battery, both for mobile phones and electric vehicles,” Sitharaman said in the Budget speech.

Budget 2025-26 has also proposed to enhance credit guarantee cover to MSMEs to ₹10 crore from ₹5 crore, leading to additional credit of ₹1.5 lakh crore in the next five years. For MSME start-ups, the credit guarantee has been enhanced to ₹20 crore from ₹10 crore in 27 focus sectors. The government has also announced a manufacturing mission and a clean tech manufacturing mission to improve domestic value addition and build the country’s ecosystem for solar PV cells, EV batteries, motors, and controllers, among others.

The mega takeaway from Budget 2025-26 remains the big tax break to the middle class with a view that more money in the pockets of the common people of India will eventually serve as a fillip to the economy in the form of higher demand and consumption. It is a strategic bet that the government has taken as consumption percolates faster to the grassroots than infrastructure, which has a longer gestation period. By not opting for enhanced consumption expenditure on the government balance sheet through direct stimulus, a smart choice has been made. It would have been inflationary and would have derailed fiscal consolidation.

In addition to the measures announced by the government in the Budget, the Reserve Bank of India also reduced the repo rate by 25 basis points in February, which will complement the tax move and boost consumption further. So, the onus to drive the economy through demand has been put on the middle class while the government continues to tread on the path of fiscal consolidation and quality expenditure — a case in point being the FY26 fiscal deficit at 4.4% is almost being fully used towards capex, which is 4.3% of GDP. It is a bet, but a calculated one, of which North Block and the PMO will eagerly await fruition in the course of the next year.