Section 1: The Union budget’s strategic tax stimulus to boost economic activity
One of the biggest highlights of the 2025 Union Budget6 was the government’s recognition of the need to bolster consumer spending—particularly among the middle-class demographic—leading to the implementation of a significant personal income tax reduction. Several indicators suggested stress among consumers due to high inflation and economic uncertainty until December 2024, including the observed slowdown in growth in the fast-moving consumer goods sector, in which urban areas saw a modest 2.8% growth in the July to September quarter of 2024, while rural areas experienced a more robust 6% growth.7
The tax-exemption announcement for incomes up to INR1.2 million (approximately up to INR1.275 million for salaried individuals), coupled with reduced tax slabs across other income brackets, was targeted at the middle-income class segment, which constitutes 31% of the population and is projected to expand to 38% by 2031.8 This will likely inject substantial disposable income into the hands of these consumers (INR630 billion; figure 2), especially among young consumers, who generally have a higher marginal propensity to spend.
In addition, this exemption is aimed at making it far more beneficial for this demographic to move to the “new regime” of income tax.9 Consequently, tax savings from investments under Section 80C (exemptions on specific expenditures and investments, available under the “old regime”) will no longer be mandated, leaving more disposable income for consumers to spend or prioritize in the form of other investments (that is, besides those allowed under Section 80C, such as life insurance, equity-linked savings schemes, medical insurance, etc.).
However, this tax stimulus has a downside: It will impact government revenues, constricting its ability to spend. According to the budget, the government will forgo INR1 trillion annually (figure 2)10 as a direct effect of these income tax exemptions. Nonetheless, higher levels of economic activity are expected to help offset the decline in revenue and help the government adhere to its fiscal deficit target.
The revenue forgone along with reduced investment requirement in the 80C scheme will translate into increased purchasing power for Indian consumers, however, leading to a potential direct boost to consumer spending—worth INR1.6 trillion annually (figure 2).
Besides, a potential boost to the economy through a consumption multiplier (increase in final income driven by new injection of spending) could create economic activity worth between INR6.7 trillion and INR7.9 trillion in the medium term, creating a cycle of economic growth.
The projected economic expansion and immediate impact on consumer spending could translate to an impact of around 0.6% to 0.7% of the nation’s GDP in fiscal year 2025 to 2026.
