Budget 2025 | A ₹1 trillion largesse for India's middle class

Dear Reader,

Speaking to the media just before the beginning of the budget session yesterday, Prime Minister Narendra Modi uncharacteristically invoked Goddess Lakshmi. “I bow before the Goddess of prosperity—Maa Lakshmi. I pray Maa Laxmi to bless the poor and middle-class people of the country," he said. Goddess Lakshmi answered his prayers in less than 24 hours.

Any individual earning an income of up to ₹12 lakh will now be exempt from paying income tax from 2025-26. Yes. This benefit is available only if you are part of the new income tax regime. Till 2024-25, this limit was ₹7 lakh. If you are still hanging on to the old income tax regime, it might be time to shift. Finance minister Nirmala Sitharaman made these announcements while presenting her record eighth consecutive budget in Parliament earlier today.

By doing so, the government has attempted to tackle the rising anger among the middle class that they are being forced to lift disproportionate levels of burden when it comes to nation building. That the government had cut the corporate tax rates, a few years ago, only fuelled the anger more.

“This Government under the leadership of Prime Minister Modi has always believed in the admirable energy and ability of the middle class in nation building. In recognition of their contribution, we have periodically reduced their tax burden," she said.

The new tax slabs are as follows:

Those earning up to ₹12 lakh per annum will get a rebate of ₹80,000 which is the full value of the tax they will be liable to pay. A person earning ₹25 lakhs will get a rebate of ₹1,10,000 which is 25% of the tax he is paying under the existing rates.

A ₹1 trillion stimulus

This largesse to the salaried folks will cost the government ₹1 trillion. Apart from soothing the nerves of the middle class, there is another important reason for leaving more money in the hands of the people. 

India’s economy, the fastest growing large economy in the world, is slowing down sharply. In the second quarter of 2024-25, India's gross domestic product (GDP) growth was just 5.4% as against 8.1% in the same period last year. One of biggest causes for this was a sharp fall in urban consumption. Consumption is what you and I spend, and this accounts for 62% of the GDP. 

India’s economy is now expected to grow at 6.5% in 2024-25 or so as against 8.2% in 2023-24.

The finance minister will now be hoping that the money she has put in the hands of the people will cause consumption to rise again and accelerate economic growth. If you would rather save than spend the additional money in your hands, the effect of the stimulus will be less, but it will go towards improving the net financial savings of households, which have fallen in recent times.

“The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment," Sitharaman said.

Also read | In 10 charts: Budget 2025 report card on railways, roads, education and health

Continuity Budget

Other than the income tax cut, the government has preferred continuity when it came to its economic policy. It has retained its focus on capital expenditure-led growth. It has budgeted an allocation that is 10% more than what it is expected to spend on capex in 2024-25. 

Capital expenditure typically helps in triggering private sector investment which has been sluggish in recent years. The consumption stimulus, which should ideally increase demand and thus capacity utilisation plus strong public spending should revive private sector investment, the government hopes. If that happens, India can register a faster pace of economic growth.

Also read | Budget 2025 math: How the government plans to cut fiscal deficit this year

Fiscal consolidation is in line with the glide path. The fiscal deficit in 2024-25 will be 4.8% and 4.4% in the next financial year. That is good news.

The focus on the informal sector also continues. Micro, small and medium enterprises have shown signs of recovery, and the government has done the right thing to enhance the limits for its credit guarantee scheme. This is important because many jobs are created in the informal sector, and without more jobs, a sustained pace of rapid growth is not possible.

The stock markets rebounded from their day's low. It appears to be assimilating the budget proposals. The immediate take on the budget is that it is fairly positive, in line with the needs without compromising the long-term needs of the economy.