India’s latest budget under Prime Minister Narendra Modi’s government takes a strategic turn toward boosting consumption at a time when economic momentum is showing signs of strain.
With inflation pressuring household finances and urban consumers pulling back on discretionary spending, Finance Minister Nirmala Sitharaman has introduced a sweeping tax cut aimed at easing financial burdens and stimulating demand.
The government has raised the income tax exemption threshold to ₹1.2 million (around $13,800), up from ₹700,000, a move expected to benefit 10 million taxpayers.
With the Treasury set to lose ₹1 trillion in annual revenue, analysts are questioning whether this policy alone can offset weakening growth.
India’s economic landscape is marked by a sharp divide. While private consumption accounts for nearly 60% of GDP, spending patterns are becoming increasingly uneven.
High-end segments and rural markets remain resilient, but urban middle-class expenditure has slowed.
This trend is evident in lacklustre earnings reports from major companies, including Reliance Retail, Hindustan Unilever, and Maruti Suzuki, which have reported weaker revenue due to subdued consumer sentiment.
The government’s tax relief is a clear attempt to rekindle spending, but will it be enough to drive a broader economic revival?
Urban demand slowdown
India’s urban consumption, once a primary driver of economic growth, has begun to falter under the weight of high inflation and stagnant wage growth.
The country’s urban population stood at 522.9 million in 2023, forming a crucial part of the consumer base. However, discretionary spending in categories like automobiles, electronics, and premium retail has seen a decline.
Kantar’s latest market research reveals that consumer confidence among urban households has dropped, leading to cutbacks on non-essential goods.
This decline is particularly concerning for sectors that rely on middle-class spending.
The automotive industry, for instance, reported sluggish sales growth, with Maruti Suzuki’s revenue slowing despite an expansion in its product portfolio.
Similarly, supermarket chains and consumer goods giants like Hindustan Unilever have struggled to maintain sales volumes, indicating weaker demand for household products.
The shift in spending patterns suggests that the tax concessions while providing short-term relief, may not be sufficient to restore broad-based consumption growth.
A critical factor behind this downturn is the debt burden carried by many urban households.
During the post-pandemic recovery, consumers took on loans to finance home purchases, education, and lifestyle expenses.
As borrowing costs remain elevated, families are prioritising debt repayments over new spending.
This trend underscores the need for complementary measures beyond tax cuts—such as policies that directly address inflation and improve wage growth—to ensure sustained demand.
RBI’s rate cuts
The Reserve Bank of India (RBI) reduced its benchmark interest rate by 25 basis points to 6.25% on Friday, marking the first rate cut in nearly five years.
This move follows the last rate hike in February 2023 and aligns with fiscal measures in the Union Budget 2025-26 aimed at boosting manufacturing, MSMEs, and infrastructure.
Industry groups, including FICCI and CII, welcomed the cut, expecting banks to lower lending rates, spurring investment and consumer spending.
Analysts see this as a shift in the RBI’s strategy, balancing financial stability with economic growth.
While maintaining a neutral stance, the central bank may continue easing if inflation remains controlled.
A rate cut eases the financial strain on households and businesses, potentially complementing the government’s tax relief by making credit more affordable.
This could help boost spending in sectors like housing and consumer durables, which have been affected by high financing costs.
However, some economists argue that a rate cut alone will not be enough to stimulate demand.
With India’s GDP growth expected to hit a four-year low of 6.4% in the current fiscal year, broader structural reforms may be needed to sustain long-term economic expansion.
The financial sector will closely watch how banks respond, as lower interest rates typically lead to higher credit demand and increased business activity.
With an infrastructure push and a softer rate environment, India could enter a phase of monetary easing, depending on inflation trends and global economic conditions.
The impact of monetary easing on government spending also remains a key consideration. Lower interest rates could provide the government with more fiscal flexibility, enabling higher capital expenditure.
Sitharaman’s budget has allocated over 3% of GDP to infrastructure projects, including urban redevelopment initiatives aimed at creating jobs and improving productivity.
If executed effectively, these projects could help bridge the gap between short-term tax relief and long-term economic sustainability.
Global trade challenges
India’s economic trajectory is not only shaped by domestic policies but also by shifting global trade dynamics.
With the US and EU adopting more protectionist measures and China facing its own economic slowdown, India must navigate an increasingly complex global landscape.
The country’s exports have shown resilience, but external factors such as geopolitical tensions and trade restrictions could present new challenges.
For instance, US tariffs on Chinese goods have led some manufacturers to diversify their supply chains, benefiting India’s electronics and pharmaceutical industries.
However, sustained growth in these sectors will depend on policy initiatives that support domestic production and attract foreign investment.
The government’s recent moves to encourage foreign direct investment (FDI) and streamline regulatory frameworks are steps in this direction, but execution will be critical.
At the same time, India’s trade relations with key partners like the UK and the EU are undergoing shifts.
Ongoing negotiations for free trade agreements (FTAs) could open new avenues for exports, particularly in technology and services.
With rising global interest rates and tighter financial conditions, investors are closely watching how India balances economic growth with fiscal discipline.
Can India sustain consumption-led growth?
India’s 2025 budget signals a clear intent to support consumer spending, but the broader economic outlook remains uncertain.
While the government’s tax relief provides immediate financial benefits, its long-term impact will depend on complementary measures such as interest rate cuts, wage growth initiatives, and targeted policy reforms.
If consumer sentiment does not improve, even significant tax concessions may struggle to drive sustained demand.
The coming months will be crucial in determining whether India can successfully transition from a consumption-driven recovery to a more balanced economic model.
Policymakers will need to carefully calibrate fiscal and monetary policies to ensure that growth is not only revived but also sustained in the face of global headwinds.
For now, investors and businesses are watching closely to see if the government’s strategy delivers the intended results.
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