The Middle Class Checks In

USUALLY, THE FOCUS OF THE BUDGET IS ON HOW THE GOVERNMENT’S treasury will be filled, but this Budget is exactly the opposite. This Budget lays a very strong foundation [for] how the pockets of the citizens of the country will be filled, how the savings of the citizens of the country will increase, and how the citizens of the country will become partners in development.”

The above quote, sourced from Prime Minister Narendra Modi’s customary remarks shared shortly after Union Finance Minister Nirmala Sitharaman finished presenting her eighth successive Union Budget—a record in itself— succinctly explained how this was a radical break from past offerings.

The government of India, the prime minister signalled, was pivoting away from the culture of extractive taxation, a colonial legacy that had systemati­cally drained the Indian economy and left it vulnerable to deadly famines, economic shocks. Instead, they now view revenues as a byproduct of economic growth—the priority of this year’s Budget. And the “fuel” to achieve this, according to the finance minister, was reforms.

Further, the government has moved to enlist citizens as stakeholders—in this instance, honest taxpayers—by sharing the economic gains. No coincidence that the beneficiaries belong to the middle class, the single largest, yet heterogeneous, cohort, which makes up the backbone of India’s consumer economy. At the least it has injected a ‘feel good’ into the economy, which is still reeling from the aftermath of back-to-back economic shocks in the aftermath of the Covid-19 pandemic.

Sitharaman also committed to kick-starting structural eco­nomic reforms and initiating a clean-up of the overhang of laws on regulation that were tripping up both domestic and foreign investments. For the last two years, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) had, for a host of reasons, including the onset of the General Election, put economic reforms on the backburner. Now, it seems to have recovered from the electoral shock it suffered on June 4, 2024 and is keen to reclaim its reforms mojo.

Pull all of this together and it is apparent that the standout feature of this Budget is the implicit inking of a ‘New Deal’ between the government and the populace in new economic cir­cumstances. One that is seeking to restore the trust quotient by mak­ing every cohort a stakeholder in the Indian economy: inside look­ing out and not outside looking in.

This compact builds on the new economic foundation that India has acquired since the turn of the millennium. One in which absolute poverty, according to the latest consumption numbers, has dropped to less than 2 per cent; where there is near-saturation access for households to electricity, cooking gas, banking and housing. And, as the finance minister shared in her Budget speech, 50 per cent of rural households now have access to tap water—seen another way, for more than 75 years the majority of households in the country have not had access to this basic right.

This New Deal recognises that India has fundamentally changed and hence has new priorities and challenges. While intellectuals and legacy media continue to be fixated on view­ing India through the prism of its underdeveloped industry, Sitharaman is signalling that this no longer holds true. This Budget, therefore, is the foundation for the country to chalk out a new growth path to achieve its audacious ambition to become a developed economy by 2047.

Indeed, this is akin to the 1991 moment, when India, headed by a different political dispensation, engineered a fundamental break from the command and control regime that had shackled industrial growth.

MACRO MANDALA

After having followed an investment-led growth strategy post- Covid, the finance minister has changed course to also follow a consumption-led growth strategy. Without pausing the au­tonomous public investment cycle, the Union Budget seeks to stimulate consumption demand by increasing net disposable incomes. This in turn is expected to trigger derived investment demand and catalyse and revive private corporate investments.

The government’s focus on supply-side measures—em­phasising private investment (which makes up about 30 per cent of GDP) through initiatives like the 2019 corporate tax break—has not sufficiently addressed the demand side of the economy. The private sector itself has pointed to low demand and underutilised capacity as key constraints, suggesting that even well-intended supply-side reforms may falter if consumer confidence remains weak.

As such, the focus now, clearly and decisively, is the home market. A series of policy tweaks have been done to address the growing evidence of under-consumption in the economy which revolve around the ₹1 lakh crore demand injection into the system through a general reduction in tax rates and a rebate— which also means that annual incomes less than ₹12 lakh will no longer be taxed.

While the increased spending capacity could drive economic growth, it also poses a risk of exacerbating inflationary pres­sures, especially if supply does not keep pace with the height­ened demand. Private consumption constitutes over 60 per cent of India’s GDP—a critical driver of economic growth—the sluggish growth in consumer spending, at around 4 per cent in 2023-24, poses significant challenges for achieving higher overall growth targets, such as 8 per cent growth in GDP.

This Budget unambiguously prioritises economic growth. Understandable, because the economy is visibly losing its mo­mentum. To be sure, India’s economic growth trajectory is still very impressive. The concern is that the remarkable recovery witnessed in the aftermath of the pandemic and subsequent economic shocks seems to be losing momentum.

Last month, the Central Statistical Office (CSO), the official gatekeeper of India’s economic data, released the country’s latest growth numbers. It surprised on the downside. Dramatically at that. Growth in GDP was estimated at 5.4 per cent in the second quarter (Q2) ended September of 2024-25.

A cursory look at the graphic which tracks quarterly growth rates reveals two trends:

– There is a secular loss in the growth momentum witnessed in the last two years;
– And, Q2 is the lowest growth rate in seven quarters.

The general surmise is that this slowdown is cyclical. However, there is a downside risk that without timely intervention, inclement global conditions may tip the scales and trig­ger a secular slowdown. A mindful fi­nance minister has therefore sought to stoke consumption levels in the economy, providing a temporary sug­ar-high that could revive both animal spirits and consumption.

It is also important to acknowl­edge that supply-side policies have contributed to creating an environ­ment where long-term investments in infrastructure, manufacturing, and technology can eventually lead to productivity gains and job cre­ation. This, in turn, could foster a virtuous cycle that eventu­ally lifts private consumption.

Overall, the policy challenge addressed by the finance minister in the Budget is to strike a balance: while structural reforms and corporate incentives are necessary for modernising the economy, boosting consumer demand through policies such as direct ben­efit transfers (DBT), increased social safety nets, and measures to enhance income growth have been helpful in reaching here. Thus, the issue is not simply one of choosing between supply or demand-led strategies but rather integrating both to create a resilient, inclu­sive economic model. This lies at the core of the New Deal.

FISCAL DHARMA AND MONETARY KARMA

This cost of the demand thrust has been borne without deviat­ing from the laid out fiscal path. Which is why Sitharaman has, rather boldly, perhaps even confidently, chosen to go for growth in the “growth-inflation” trade-off evidence that inflation has put real incomes, both urban and rural, under pressure. More so, in the face of an uncertain and inclement global environment. In the months to come, the key challenge will be to accelerate growth while managing inflationary risks.

With the rupee having depreciated by 3 per cent in the first nine months, the trade deficit is coming under upward pres­sure. Increased import costs not only widen the deficit but also contribute to domestic inflation, a factor that the Budget’s fiscal consolidation efforts are keen to address. Moreover, heightened volatility in the rupee increases hedging costs and introduces uncertainty into international transactions, complicating the outlook for export growth.

The action will now shift to Mint Street for the Reserve Bank of India (RBI), under a new leadership, to align the monetary policy with the fiscal policy underlying the Union Budget. While an accommodative monetary policy is the obvious stance, RBI need not rush into a rate cut until the fiscal stimulus “works its way through the system”.

Monetary easing will be most appropriate, when the economic stimulus of ₹1.0 to ₹1.5 lakh crore, including state investments, increased consumption from tax relief, and enhanced infrastructure outlays, begins to generate momentum in economic activity.

Till then RBI may prefer to recalibrate its levers of liquidity control in such a way as to increase the velocity of circulation of money without enhancing the quantum. Perhaps undertak­ing targeted repo operations that can stimulate borrowing for productive investments. These measures would help en­sure that while borrowing costs remain steady, the overall dynamism of the economy improves, thereby supporting employment and growth.

It could also do well to consider putting some risk capital into the system rather than just keeping North Block happy with fat dividend cheques. From ₹1,500 crore in the early nineties, the RBI dividend is now estimated to be ₹2.11 lakh crore. The same can be deployed in the economy as risk capital which RBI is empowered and mandated to do under the RBI Act of 1934.

MIDDLE-CLASS GHARANA

Two years ago, Sitharaman had acknowledged the middle class by ushering in a new tax regime—sans tax sops. The idea was to free the middle class, which is overwhelmingly young, in its investment decisions rather than be guided, like in the past, by ‘big brother’.

This was a tacit acknowledgement of the makeover that has been underway in India, especially in perceptions of risk. And this is most apparent in the growth of demat accounts. As the graphic shows, in just five years, the number of demat accounts has grown over fourfold.

An analysis of income tax numbers reveals that a large chunk of the middle class has traded up in the last 10 years and is grow­ing the tax base. For instance, in places like the Northeast, Chhat­tisgarh, even Jammu & Kashmir, the new income tax returns (ITR) filings have grown in double digits. In fact, the growth was something like 20 per cent-plus, while in the traditionally big states, the growth is lower at around 9-10 per cent.

From the graphic, it is apparent that growth in ITRs over the decade ended 2022-23 is staggering. In every slab, the number of individuals filing income tax returns has at the minimum trebled and in some instances quadrupled. This is consistent with the growing trends in wealth creation—investments in a range of financial instruments, including stock markets— which have steadily acquired momentum with growing financialisation of savings.

The assets under management (AUM) of the Indian mutual fund industry—a popular means of investing in stock markets—have surged in the last decade. AUM grew more than four-fold from ₹10 lakh crore in May 2014 to a massive ₹46.37 lakh crore on July 31, 2023.

In a post-Budget interview with Open (‘The Idea of Empower­ment rather than Entitlement Has Gained Ground,’ February 13, 2023), Sitharaman, in response to a pointed question on the logic of the new tax slabs sans sops, said as much:

“Yes, absolutely! That is what I also tell people who say that because of the emphasis on the new tax regime I have disincentivised invest­ment, insurance, and so on.

My reply is that I don’t think we should judge the assesses. If a person has more money in hand, then such a person can figure out where to put it or how to use it; rather than saying that incentive lies in a particular option. A person can prioritise for his family. How can the government be the better judge?

So these changes give confidence to income taxpayers that they have more money post-tax and they know what to do with it.”

The finance minister had shared a great insight here. She argued that one size does not fit all. It worked in an old India where there were few options and hence risks were steep. Further, dispos­able incomes were hard to come by and inducements like tax breaks were used to incentivise the middle class to save.

Today, the middle class is mature enough to decide how to spend. Exactly why the finance minister is confidently transferring ₹1 lakh crore to the wallets of the middle class to use as it wishes. Ac­cording to government officials, the tax rebate together with the lower tax slabs would mean that one crore more people will not pay taxes.

India’s middle class, already more than the population of most countries, is poised to explode in the next decade. According to data sourced from PRICE (People Research on Indian Consumer Economy), the middle-class cohort is estimated to be around 40-50 crore and projected to grow to 71.5 crore by 2030. To be sure, the middle class is not a homogenous entity and is varie­gated across income groups.

According to PRICE, the middle class is already the biggest contributor to national wellbeing. It accounts for:

– 50 per cent of income;
– 48 per cent of spending;
– 52 per cent of savings.

And not to forget, 50 per cent of this cohort is made up of women who are acquiring a mind of their own. Both, numerically and politically, the middle class is therefore a cohort that cannot be ignored. The latest consumption numbers reveal that absolute pov­erty has fallen to below 2 per cent. In other words, the middle class is now the single largest cohort and this year’s Budget sops have put them centrestage.

GLOBAL CHAKRA

Despite the government’s innova­tive strategy to leverageexpendi­ture equity and attract private capital through robust public-private partnerships (PPP), foreign investments in India have been declining due to a confluence of global and domestic challenges. Global factors—such as rising interest rates in de­veloped economies (particularly the US), a strong dollar, and heightened geopolitical uncertainties—have made investors more risk-averse towards emerging markets.

Domestically, lingering regulatory complexities, bureau­cratic hurdles, tax overreach and concerns about the speed and efficacy of infrastructure project execution further deter foreign capital. These combined factors increase the perceived invest­ment risk, causing foreign investors to pull back even as India pushes for a transformative financing model.

Globally, uncertainties remain high with ongoing trade ten­sions and potential shifts in US policy. President Donald Trump’s tariff threats—as part of his ‘America First’ agenda—are pressur­ing countries to reconsider their duty structures. India’s recent removal of certain import duties (for example, on key smart­phone parts) is intended both to boost local manufacturing and to position the country favourably in global supply chains amid US-China trade disputes.

The Budget has signalled that further tariff adjustments may be forthcoming, aimed at reducing import dependence and enhancing export competitiveness. In an era when many nations are negotiating trade deals without the US, India’s proactive stance on trade policy is expected to help diversify its export markets.

In the context of the Union Budget 2025–26, the rupee’s per­formance is emerging as a key factor influencing both fiscal and monetary policy decisions. In the first nine months of FY25, the rupee has depreciated by about 2.9 per cent. While reports indicate that the currency is trading in a range of roughly ₹86-87 per dollar, this relatively modest decline—especially when com­pared to steeper falls in other emerging markets—is the result of a mix of external pressures and proactive interventions by RBI.

In the Budget’s broader framework, policymakers are cautious about relying solely on the export boosting effects of a depreciated rupee. The government recognises that for the rupee’s weakening to translate into tangible export gains—and to avoid fuelling domestic inflation—the cost pressures on im­ported inputs must be managed effectively. As such, the fiscal strategy outlined in the Budget, with its emphasis on targeted state-level spending and structural reforms, is designed to create a more resilient domestic economy that can absorb external shocks while still maintaining competitiveness in global trade.

Overall, while certain export-oriented sectors such as IT, phar­maceuticals, auto and engineering, textiles, etc might benefit from a controlled depreciation of the rupee, the net impact on India’s trade balance remains mixed unless input cost pressures and exchange rate volatility are kept in check. This interplay is a critical part of the Budget’s balancing act between promoting growth, containing inflation, and ensuring fiscal prudence.

While the content of the Budget is broadly right in terms of direction and so too in detail, it is the global context in which it is presented that brings in concerns. Globally, uncertainties remain high with ongoing trade tensions and po­tential shifts in US policy.

Trump’s tariff threats and recent stop-go actions against Mexico, Canada and China are pressuring countries to reconsider their duty structures. While the Budget has signalled further tariff adjustments, aimed at reducing import depen­dence and enhancing export com­petitiveness, outlining the possible responses to such an evolving situation would have helped allay the apprehensions of the markets.

RAJ DHARMA

The finance minister seems to be in a collaborative mood with the states, but that intent got buried under her benevolence to Bi­har! More than the financial outlay for 50-year interest-free loans to states to fund capital expenditure and reform incentives, the three-year pipeline of infrastructure projects to be implemented in PPP mode with states holds big potential. So too, leveraging the India Infrastructure Project Development Fund (IIPDF) for development of 50 tourist destinations along with states.

The proposed framework to promote Global Capability Cen­tres (GCC) can go a long way to improve the regulatory gover­nance at the state level. It will streamline non-financial sector regulations, certifications, licences, and permissions. These reforms are designed to enhance the ease of doing business and foster industry collaboration, yet their success depends heavily on each state’s capacity to implement complementary measures.

The Budget presents some initiatives that replicate a model of collaborative state-Centre engagement and cooperative federalism. The central strategy includes a three-year pipeline of infrastructure projects to be implemented in PPP mode— with states encouraged to participate and leverage IIPDF for proposal preparation—and an ambitious plan to develop the top 50 tourist destinations in partnership with states. In these tourism initiatives, states are required to provide land for key infrastructure while receiving performance-linked incentives for destination management, cleanliness, and marketing.

Moreover, the Budget outlines a national framework to promote GCCs in emerging tier-2 cities and establishes a High Level Committee for Regulatory Reforms aimed at streamlin­ing non-financial sector regulations, certifications, licences, and permissions.

Reinforcing the extra layer to the fiscal architecture Sitharaman had initiated in an earlier Budget, she has earmarked approximately ₹1.5 lakh crore for 50-year inter­est-free loans to states for capital expenditure and reform incentives. This initiative is intended to boost infrastructure spending at the state level by enabling long-term investments without the burden of high borrowing costs. Yet, questions remain as to whether all states will be treated equally or if coalition states with closer political ties to the Union govern­ment will be favoured.

TAX TANTRA

With revenue concerns well and truly behind, it might be a good idea to take the indirect tax regime to the next level of GST 2.0. The revenue collection of close to ₹2 lakh crore a month, from more than 125 crore returns filed, with 350 crore e-way bills generated for 1.5 crore active taxpayers is evidence that the sys­tem is running well for the government. It needs to work better for businesses as well—time the GST Council delivered on the founding promise of the Good and Simple Tax.

The finance minister hinted about a possible GST rejig in terms of rates. There is a need to rationalise the tax structure as well as expand it to the remaining sectors. The current GST slabs of 5 per cent, 12 per cent, 18 per cent, and 28 per cent can be consolidated into three categories without any revenue loss. A three-tier structure was the one originally envisaged. The multiplicity of rates that have crept in goes against the spirit of GST and they must go.

Also, some sectoral issues have surfaced—chief among them being textiles, tourism, exporters, and handicrafts—which need to be resolved. For tourism, it is imperative that the tax refunds system is put in place as soon as possible. The effective tax bur­den on exports as well as handicrafts has become high compared to the previous tax regime. The issue of embedded taxes for ex­ports will have to be resolved through a proper mechanism and not in an ad hoc manner.

In the final analysis, it is clear that this year’s Union Bud­get seeks to lay the foundation of a new Indian economy and recalibrates the development priorities accordingly. As Prime Minister Modi said in his post-Budget remarks, “This budget not only takes into account the current needs of the country, but also helps us prepare for the future.”

 

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