A Pivot to Consumption-led Growth: Will it Work?

The increase in the income tax exemption limit to Rs 12 lakh (effectively Rs 12.75 lakh, adding in the standard deduction) is, without doubt, the highlight of Budget 2025-26, along with the new slab structure and the reforms to make taxation simpler for both the tax-payee and the government. We will have a more detailed understanding of the latter once the new Direct Tax Code bill is introduced next week and passed.

The message in the changes in I-T, seen alongside the de-emphasizing – at least in the Budget speech -- of infrastructure capex, which has been the highlight in the last few Budgets, conveys a pivot to a consumption-led growth expectation from a public capex-led strategy.

Extending that logic, the government perhaps expects the other weak leg – private investment – to grow muscle once consumption recovers.

Public capex at Rs 11.21 lakh crore is more or less the same level as in the previous Budget and seems to be on autopilot now. One notable addition is the Rs 1 lakh crore Urban Challenge Fund, although its success will depend on how states and city administrations utilize any funds they win.

Under the new tax regime, salaried individuals will save between Rs 80,000 (Rs 12 lakh annual income) to Rs 1,10,000 (Rs 24 lakh annual income). Clearly, the focus is on the urban middle class. Taken alongside the focus on agriculture and MSMEs, it’s also a pivot from the ‘Budget for big people’ to a ‘Budget for small people’.

It’s a good chunk of money to leave in the hands of consumers – an extra Rs 6,000+ to Rs 9,000+ a month. While the growth strategy is premised on them spending that money, two factors could deter them from doing so. One, the tax saving comes in an inflationary environment. Two, the middle class continues to fear job market uncertainties and worry over the lack of wage growth – issues that have not been addressed directly in the Budget. They may prefer to loosen their purse strings only for a little more comfort on food and essentials. They may even choose to save, rather than spend, the extra money in their hands, given the general environment of economic uncertainty.

The Economic Survey made two clear prescriptions: Focus on domestic growth because the geopolitical/geoeconomic environment is not conducive for exports; and, deregulate the economy – “get out of the way”. The Budget nonetheless chooses to shower attention on exports. Perhaps it sees sectoral opportunities – such as in textiles. There is also a hint of the direction on tariffs on imports, but the government has wisely left any major action on it for after Prime Minister Narendra Modi’s expected meeting with US President Donald Trump in February.

On deregulation, while the Budget has tinkered a bit, the government has left the major job to be done for later – leaving it to a committee to make recommendations.

Missing in the Budget is the incessant buzz on AI that one hears everywhere these days, except for an announcement on providing 10,000 fellowships for technological research at the IITs and the IISc. Separately, of course, the government has set the India AI Mission in motion, with an outlay from the previous Budget.

Interestingly, Budget 2025-26 keeps up the government’s focus on nuclear power expansion to achieve energy transition. It even has a target in mind now – at least 100 GW by 2047 – and promises to amend the Atomic Energy Act and the Civil Nuclear Liability Act to bring in the private sector.

Politically, one may be tempted to call it a ‘Bihar Budget’, though unsurprisingly so.