On Saturday, the Modi government unveiled the largest tax relief in a decade to stimulate consumer demand and revive growth in the world’s fifth-largest economy. Finance Minister Nirmala Sitharaman has unveiled significant tax cuts in the 2025-26 Union Budget.
Economic growth in India is projected to hit a four-year low this fiscal year, driven by sluggish demand, particularly in urban areas where the cost of living has surged.
These changes are poised to put more money in the pockets of India’s burgeoning middle class, potentially reviving sluggish urban consumption.
The Urban Consumption Conundrum
Recent years have seen a noticeable slowdown in urban consumption, a key driver of India’s economic growth. Rising costs of living, coupled with stagnant wage growth, have squeezed household budgets, leading to cautious spending patterns among city dwellers.
Breaking Down the Tax Relief
The new tax structure offers substantial relief:
- No tax on annual income up to Rs 12 lakh (previously Rs 7 lakh)
- Reduced tax rates for incomes between Rs 15 lakh and Rs 24 lakh
- Standard deduction of Rs 75,000 for those earning up to Rs 12 lakh annually
These changes could result in annual savings of up to Rs 80,000 for many taxpayers.
The Middle-Class Spending Boost
Sunil Damania, Chief Investment Officer, Mojopms, notes, “The key highlight of the Budget is income tax relief for the middle class. Additionally, the government has maintained its fiscal glide path, targeting a fiscal deficit of 4.4 per cent of GDP, while emphasizing ease of doing business. Unlike previous Budgets that focused on increasing capital expenditure, this time the priority appears to be efficient deployment of allocated funds rather than just raising allocations.
In our view, these measures will stimulate the consumption cycle, supporting stronger economic growth. With no major negatives and the Direct Tax Code set to be presented next week, this Budget has largely met our expectations.”
This additional cash flow is expected to stimulate spending across various sectors:
- Retail: Increased footfall in malls and e-commerce platforms
- Travel: More frequent domestic trips and weekend getaways
- Dining: Higher restaurant patronage
- Durables: Potential uptick in appliance and electronics sales
Economic Ripple Effects
The government anticipates these tax cuts will have far-reaching impacts:
- Increased consumer demand
- Higher household savings and investments
- Potential boost to GDP growth
Finance Secretary Tuhin Kanta Pandey emphasized, “We expect these measures to lead to higher consumption, savings, and investments in the economy.”
Challenges and Considerations
While the tax relief is substantial, some economists caution that its full impact may take time to materialize. Factors such as inflation and global economic uncertainties could influence consumer behavior.
Additionally, the government estimates a revenue foregone of around Rs 1 trillion annually due to these tax cuts. This fiscal space will need to be carefully managed to ensure long-term economic stability.
Looking Ahead
As India aims to reclaim its position as one of the world’s fastest-growing major economies, reviving urban consumption is crucial. These tax cuts represent a significant step towards empowering the middle class and stimulating economic activity in India’s cities.
The coming months will be critical in determining whether this financial relief translates into the much-needed consumption boost that could propel India’s economy to new heights.
