The annual Union Budget has sparked intense debate about its long-term impact on the Indian economy.
One of the most significant announcements in the Budget has been the overhaul of the income tax structure, which has provided a major boost to the salaried middle class. The most notable feature is the introduction of a zero-income tax for individuals earning up to Rs 12 lakh annually. This move is designed to offer relief to the middle class, a demographic that has been bearing the brunt of inflation and rising living costs for years.
On the surface, this reform is a direct hit for the middle class, easing their financial strain. However, a closer look reveals that while tax relief is given, it comes with some caveats. The rebate applies only to the new tax regime, meaning individuals who prefer to continue claiming exemptions under the old regime may not benefit from this reduction. Furthermore, the government's decision to increase the standard deduction to Rs 75,000 is likely to make the system simpler for some, but it doesn't address the structural inefficiencies and complexities that many individuals still face.
Moreover, the broader question remains, can tax relief alone rejuvenate an economy struggling with weak industrial growth and declining real wages? While individuals may benefit from short-term tax cuts, they need more sustainable measures for long-term financial health. For example, the ongoing stagnation in salaries, which are reportedly at the levels of 2017-18, paints a bleak picture of the economy's failure to generate substantial wage growth, even as corporate profits soar.
The Budget has been described by some as a "Band-Aid" solution, with much of its content tailored to appease specific constituencies ahead of state elections. One glaring example of this is the considerable focus on Bihar, with multiple announcements made specifically for the state, including the creation of a Makhana Board, expansion of Patna airport, and increased infrastructure spending. While such initiatives will undoubtedly benefit Bihar, they also raise questions about the political motivations behind these provisions, especially given that Bihar will be holding elections soon. Some critics have even gone so far as to dub the Budget "B for Bihar," insinuating that it was more about securing votes than addressing the national economic crisis.
The budget also attempts to foster growth in the business sector. The government has raised the loan limits for MSMEs to Rs 10 crore, while startups can access funding up to Rs 20 crore. Additionally, a Rs 10,000 crore deep-tech fund will be created to encourage investment in next-generation technologies, which will be crucial in India’s race to become a global leader in innovation. These measures aim to stimulate entrepreneurship, which is critical for job creation and driving the economy forward. The government’s focus on expanding the manufacturing sector and simplifying regulatory processes will also encourage businesses to expand.
But this is where the long-term vision appears to be lacking. The Budget’s emphasis on sectors like toy manufacturing, while positive for certain regions, highlights the government’s limited focus on more strategic, high-growth sectors like artificial intelligence, defence, and renewable energy. As the world’s economic landscape shifts towards cutting-edge technology, India must not become complacent in its efforts to drive innovation across all industries.
One of the biggest concerns is the government’s projected GDP growth rate for 2024-25, which is expected to fall to 6.4%, the lowest in four years. This decline reflects the poor performance of the industrial sector, which has been struggling with low productivity and insufficient investment. Real wages, as noted earlier, have stagnated, leaving the majority of the workforce with little purchasing power to fuel economic growth.
Additionally, the Sensex, which had shown significant gains in the days leading up to the Budget, ended up with a flat performance on Budget Day, reflecting investor uncertainty. Even as the government has tried to balance the fiscal deficit by cutting expenditures in some areas, critics argue that these cuts could hurt long-term growth, especially in rural areas and key sectors such as agriculture, health, and education.
The government’s decision to increase foreign direct investment (FDI) in the insurance sector to 100% is a positive move to attract international capital, but it remains to be seen whether such measures will be enough to offset the broader economic stagnation. After all, foreign capital alone cannot revive an economy suffering from weak domestic demand and high income inequality.
The 2025 Budget is undoubtedly a mixed bag. While it offers substantial relief to the middle class through income tax cuts and rebate systems, it fails to address the root causes of India’s economic malaise, such as stagnating wages, declining industrial output, and growing inequality. The focus on political appeasement, especially in Bihar, has detracted from the need for a more comprehensive, long-term economic strategy.
The government has delivered a Budget that might soothe some immediate concerns, but it has not laid out a vision that will pull the Indian economy out of its current stagnation.