While the first Budget of the Modi 3.0 government appears to be middle-class-friendly, it falls short of implementing substantial measures to boost consumption demand in both rural and urban India.
The superficial and ‘window-dressing’ measures may not effectively stimulate the demand side, which is crucial at this juncture. Experts suggest that for India to achieve its goal of becoming a developed country by 2047, the economy needs to grow at an average rate of 10 per cent a year over the next 25 years. Therefore, it is essential to analyse the efficacy of proposed measures in supporting consumption and investments in the economy amidst a changing domestic and global macroeconomic landscape.
Insufficient demand-side push
In a historic move, the Budget announced an income tax exemption limit up to ₹12 lakh with an additional standard deduction of ₹75,000, costing the government ₹1 lakh crore.
This move aims to ease the growing frustration of the middle class, driven by high taxes, surcharges, costly mortgages, rising education expenses, and limited public services.
With job creation stagnating and living costs soaring, taxpayers have demanded relief. This is expected to increase disposable income for the taxpayers of the Indian middle class and increase consumption in a demand-constrained economy. However, according to the Central Board of Direct Taxes (CBDT), the number of direct taxpayers in India was 10.4 crore in 2023–24, which is less than 7 per cent of the population. Therefore, can income tax relief alone be a panacea for the lacklustre demand?
It is even more worrying when juxtaposed with recent data from the Ministry of Statistics and Programme Implementation (MOSPI) on Monthly Per Capita Consumption Expenditure (MPCE), which shows a mere 3.5 per cent increase between August 2023 and July 2024.
Rural-urban gap
A deeper analysis reveals a widening rural-urban expenditure gap at constant prices, with increases of 25 and 29 per cent during 2022-23 and 2023-24, respectively. When breaking down consumption expenditure into fractiles, the lower income groups show growth in expenditure compared to the higher income groups in both rural and urban areas.
Interestingly, there is a decline in average consumption expenditure among the affluent class. A lack of cognizance of such facts and failing to provide sufficient fiscal policy support to boost domestic consumption could have detrimental effects on the economy.
The Budget highlighted five key policy priorities, and they are agriculture, Micro Small and Medium Enterprises (MSMEs) with export promotion, inclusive growth, green energy, and infrastructure.
Notable initiatives include expanding nuclear and renewable energy, boosting internet access in government schools, raising MSME credit limits, cutting tariffs on machinery parts, easing GST compliance, decriminalizing I-T filing delays, increasing the TCS-free limit for international transfers, and extending India Post Payments Bank’s role in agricultural credit.
However, reduced allocations in the agriculture sector, stagnated food subsidy at ₹2 lakh crore and status-quo on MNREGA allocations at ₹86,000 crore would have far-reaching implications on boosting rural demand and hence consumption.
Key proposals such as building rural prosperity, resilience and spurring agriculture growth aim to enhance rural consumption. However, the boost is contingent upon the quantum of employment generation, increase in wages and their income.
Notably, measures on Minimum Support Price for essential agricultural crops remained muted in the Budget announcement. Besides, it’s a disappointing fact that there are no significant measures targeting the boost of urban consumption.
The overall Budget has increased from ₹47.16 lakh crore (Revised Estimates) in 2024-25 to ₹50.65 lakh crore. Revenue expenditure grows by only 6.66 per cent year-on-year, reaching ₹39.44 lakh crore, while capital expenditure also increases by 10.08 per cent year-on-year, amounting to ₹11.21 lakh crore.
However, the total expenditure as a share of Gross Domestic Product (GDP) has gone down from 14.6 per cent in 2024-25 to 14.2 per cent in 2025-26. The spending cut with respect to GDP could be dearer for the economy at this point, where an expansionary fiscal policy targeting an increase in cash in hand for the people is warranted.
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Challenging environment
The Budget has been presented during the testing times of the Indian economy, wherein the global and domestic macroeconomic headwinds loom large. The economy touched a four-year low growth of 6.4 per cent after the Covid-19 pandemic in 2024-25, as per the first advanced estimates published by the government.
This is largely due to a sharp decline in manufacturing growth from 9.9 per cent in 2023-24 to 5.3 per cent in 2024-25. The private investment as measured by the Gross Fixed Capital Formation (GFCF) declined to 5.4 per cent from 11.6 per cent for the same period.
These trends also pinpoint a demand problem in the economy as reflected in other high-frequency data indicators to gauge economic performance. The Economic Survey 2024-25 highlights a slowdown in urban demand, as reflected in the deceleration of passenger vehicle sales growth, which dropped to 4.2 per cent between April and November 2024, down from 9.2 per cent during the same period in 2023.
This weakening demand is also evident in reduced spending by the urban middle class on Fast Moving Consumer Goods (FMCG). This trend is significant as urban demand plays a key role in driving investment and subsequent manufacturing growth.
Further, the downturn in sales of low-end cars and smaller residential flats underscores the contraction in private consumption. There are no major signs of job creation in the economy except for the rise of self-employment. The Periodic Labour Force Survey (PLFS) data show stagnation in real wages. The Budget failed to respond to these downturns to put the economy back on track.
An over-emphasis on fiscal consolidation, fiscal deficit aiming at 4.4 per cent of GDP may be compromising the growth and development prospects. India’s nominal GDP is projected to grow by 10.1 per cent in FY26, with gross tax revenue expected to rise by 10.8 per cent, which looks realistic.
Capital expenditure is budgeted to rise by 10.1 per cent over the Revised Estimate for FY25. Notably, the FY26 capex outlay is just ₹10,000 crore higher than the original FY25 estimate.
Having driven capex growth over the past four years, the government now expects private investments to take the lead, supported by incentives for manufacturing and a push for Public-Private Partnerships.
In the context wherein, the private sector investments show a southward trend despite a slew of incentives and tax concessions offered by the government over the past few years on the one hand rising corporate profits seem to suggest that the private sector is less likely to step in and boost investment growth.
Further, with external headwinds such as geopolitical tensions, trade conflicts and commodity price shocks, export-oriented manufacturing growth is a risky proposition.
Hence the domestic growth push is vital to ignite the growth trajectory. The growth prospects need essentially be supported by pick up in consumption across the board through increased expenditure allocation on social welfare complemented by the tax relief measures. This Budget rides a lot on the economics of hope rather than pragmatism.
The writers are Assistant Professors at Gulati Institute of Finance and Taxation, Thiruvananthapuram
