- India’s GDP growth has declined from 6.7% in August 2024 to 5.4% in November 2024, reflecting slowing economic momentum
- With India’s population of approximately 1.42 billion, only 8.09 crore income tax returns were filed in the fiscal year 2023-24, accounting for just 5-6% of the total population
- This budget fails to address several key economic challenges, including currency depreciation, declining markets, and the need to stimulate consumption
CHIRAYU SHARMA, JADHAV CHAKRADHAR & PRAVIN JADHAV
The highly anticipated Union Budget 2025 has been unveiled at a time when the Indian economy faces mounting challenges. With the rupee experiencing continued depreciation, foreign institutional investors (FIIs) engaging in persistent net sell-offs since October 2024, and the stock market witnessing a prolonged downturn, expectations from the government have soared. Adding to these concerns, India’s GDP growth has declined from 6.7% in August 2024 to 5.4% in November 2024, reflecting slowing economic momentum. In this backdrop, the budget is seen as a crucial policy instrument to restore investor confidence, stabilize macroeconomic fundamentals, and provide much-needed relief to businesses and households.
Tax relief up to ₹12 lakh is akin to offering a tissue to someone drowning
The government’s tax relief of up to ₹12 lakh for middle-class individuals has certainly grabbed attention. Analysts suggest that this move puts more money into people’s hands, stimulating spending and boosting overall demand in the economy. While this is true to an extent, the reality is that this tax relief may be akin to offering a tissue to someone drowning. With India’s population of approximately 1.42 billion, only 8.09 crore income tax returns were filed in the fiscal year 2023-24, accounting for just 5-6% of the total population. This suggests that a significant portion of the population does not participate in the tax system, limiting the potential impact of such relief on the broader economy. As a result, it may not provide the expected boost to the structural issues that the Indian economy has been facing.
Only top 5–10% of the population pays for nation-building
Historically, an individual was required to earn 3.5 times the national per capita income to become liable for income tax. However, this threshold has now increased to six times the per capita income, resulting in only the top 5–10% of the population being subject to income taxation. This shift further reduces the tax burden on high-income earners, potentially exacerbating income inequality and diminishing the overall impact of tax relief on the broader economy. Consequently, this may contribute to a widening income gap between the wealthy and the economically disadvantaged.
Budget fails to meet expectations
The stock market is often a key indicator for assessing the impact of the budget. In this case, the tax relief failed to elicit a positive response. The stock market indices reacted negatively, with the Nifty 50 closing lower. This decline clearly indicates that the budget did not meet expectations or align with market anticipations, contrary to what was expected.
FM sets capex outlay for 2025-26 at ₹11.2 tn, a modest increase
Capital expenditure (capex) is crucial for driving economic growth, but the Union Finance Minister, Nirmala Sitharaman, has set India’s capex outlay for 2025-26 at ₹11.2 trillion (approximately $130 billion), marking only a modest increase from the previous year. Many analysts have labelled this as a marginally negative development for the markets, placing pressure on industrial and infrastructure firms. Which is clearly seen from the Stocks like Larsen & Toubro (LART.NS), PNC Infra (PNCI.NS), and NBCC (NBCC.NS) saw drops ranging from 3.3% to 5.1%, with L&T being among the top three Nifty losers. This response suggests that the government’s capex measures may not be enough to significantly boost consumption or drive robust growth in the economy.
Gross borrowing target exceeds expectations
The government has revised its gross borrowing target for FY26 upward by 5.7%, setting it at ₹14.82 lakh crore, compared to ₹14.01 lakh crore in FY25. While this may help in narrowing the fiscal deficit, it raises concerns regarding the overall economic health. Even the bond market has also shown caution in response to the increased borrowing, reacting negatively to the announcement. The borrowing target exceeded expectations, and following the budget announcement, India’s 10-year benchmark yield rose by 0.016%, reaching 6.694%. There are also concerns about a potential further increase in this yield due to the higher supply of bonds in the market, which will be needed to fund the additional borrowing.
Moody’s maintains investment rating for India
Reflecting these concerns, Moody’s has maintained its investment rating for India, with a growth projection of 6.6%. Earlier in January, Moody’s had downgraded India’s economic growth forecast to 7% for the fiscal year ending March 2025, down from 8.2% in the previous fiscal year. This rating poses a challenge for India’s economy, especially when trying to attract Foreign Institutional Investment (FII), which is crucial for sustaining economic growth. Upgrading India’s investment grade by rating agencies is essential, as it could trigger FII inflows, not only boosting the stock market but also strengthening the currency.
Budget lacks significant programs aimed at increasing jobs
This budget fails to address several key economic challenges, including currency depreciation, declining markets, and the need to stimulate consumption. Furthermore, it has not met the expectations of analysts and market participants, leaving these critical issues unresolved. Structural concerns persist, as the budget lacks significant programs aimed at increasing employment and reducing poverty, which were widely anticipated.
The authors of this article are Chirayu Sharma, Independent Researcher, Pune; Jadhav Chakradhar, Centre for Economic and Social Studies, Hyderabad and Dr Pravin Jadhav, Department of Economics, The Institute of Infrastructure, Technology, Research and Management (IITRAM), Ahmedabad
