By Dr D M Deshpande
The middle and salaried class get a big relief in income tax in the Union Budget presented by FM Nirmala Sitharaman. She delivered her eighth consecutive budget, and by all counts, it was not an easy job. There are challenges galore before the economy. Though all of them couldn’t have been addressed by the central budget, it is still an important policy plan that could make a substantial difference.
India has been and continues to be one of the fastest-growing economies among large nations. Though the global outlook for growth is not optimistic, the concern is that India’s growth has slid to a low of 6.4%. This does not go well with our professed aspirations of taking the economy to the level of $5 trillion or getting out of the low middle-income trap and graduating to a higher income group.
IT reforms: Landmark announcement
Revisions in personal income tax exemptions and tax slabs were long overdue. Though last year’s budget provided full relief from paying income tax for those earning up to Rs. 7 lakhs per annum, there wasn’t much for others in the middle-class category. In what can be termed a landmark, the FM has announced nil tax liability for those earning up to Rs. 12 lakhs per annum.
Impact of tax reforms on consumption, Investment
The income tax slab rates have been reduced across the board, which serves the useful purpose of putting more money in the hands of the consumer. In keeping with the rising inflation rates, the highest marginal rate of 30% (excluding cess) kicks in only from incomes above Rs. 24 lakhs per annum. This is bound to boost consumption demand, particularly in urban and semi-urban India.
The FIIs are continuing to pull out money from India, and hence the stock markets are virtually in the grip of bears. If the tax savings as a result of the new budget—or even a part of it—find their way into equity or mutual fund investments, it would positively impact market sentiments.
Lack of focus on growth, infra
Normally, more money in the hands of consumers means more demand, especially for the FMCG sector. However, growth concerns are hardly addressed. Unlike previous budgets, there is no strong thrust on capex or infrastructure. Given that private investment has not picked up significantly post-pandemic, the government has played a crucial role in boosting GDP growth through infrastructure spending. With the actual allocation to capex dropping, it is unclear how the government plans to sustain economic growth.
Corporate tax and manufacturing sector expectations
Indian tax rates are not high compared to Western developed nations, but they are not as competitive as the tax rates in ASEAN. To support domestic manufacturing, corporate tax rates were previously reduced to 15% for new units. However, this provision was withdrawn in the last budget, meaning that post-March 31, 2024, this concession would not apply to new enterprises. Many expected this provision to be reinstated, but that did not happen.
Fiscal deficit and budget discipline
As in the previous budget, the government is committed to pursuing the path of fiscal consolidation. Though a small step, the downward revision of the fiscal deficit for FY25 by a marginal 0.1%—from 4.9% to 4.8%—is reflective of the government’s resolve. Despite the widespread culture of distributing freebies, it is commendable that the deficit is pegged at 4.4% for FY26.
Sectoral allocations: Agriculture and rural development
Agriculture remains a focus area, with self-sufficiency in pulses and a longer-term plan for cotton.
Digital economy and AI
The digital thrust continues in this budget, recognizing the growing importance and challenges posed by AI, along with India’s strength in this field.
Healthcare and education
Education, skilling, and healthcare receive due attention and allocation. Adding 10,000 new medical seats at the undergraduate level is a welcome measure to meet the expanding healthcare needs. Additionally, 10,000 technological scholarships have been announced for students undertaking research in IITs and IISc.
Tourism and fisheries
Tourism receives a boost, which can benefit states like Goa. The FM has also highlighted the importance of fisheries and its potential.
Special allocations
The state of Bihar has received special treatment, likely due to upcoming elections and the significance of Nitish Kumar as an ally of the NDA government.
A prudent yet cautious budget
This budget can be termed transformative for the middle class and demonstrates prudent fiscal management. However, there is no major initiative to provide a growth stimulus. Some employment generation may happen through MSMEs and tourism, but given the job crisis among educated youth, more could have been done.
It is also unclear whether last year’s proposal for internships in private corporate undertakings has been continued. The new income tax bill, set to be presented next week, could further advance direct tax reforms—a long-awaited move. The FM has generally understated and overperformed. One hopes that this time too, she succeeds in doing so.
(The writer is a former Vice Chancellor of ISBM University, Chhattisgarh.)
