FM Nirmala Sitharaman bets on salaried middle class to power economy

Finance minister Nirmala Sitharaman on February 1 placed the bets firmly on India’s vast consuming salaried and middle class to power the economy, announcing wide-ranging changes in income tax rates and slabs in the 2025-26 Union Budget in a plucky drive to push growth amid fast gathering global headwinds.

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Amid signs of moderation in the broader economy, Sitharaman unveiled measures to catalyze a swift recovery by putting more money in people's pockets through tax breaks, and amplifying their purchasing power.

This is predicated on the assumption that higher disposable income will stimulate demand for goods and services. This, in turn, could set off a cycle of investment as companies eventually start adding capacities to meet the extra demand.

Under the proposed new slabs and rates, anyone with an annual taxable income of upto Rs 12 lakh (excluding capital gains income) will not have to pay any taxes.

This, effectively, means that those with annual income of up to Rs 12.75 lakh will not have to pay any tax, including a standard deduction benefit of Rs 75,000.

“Slabs and rates are being changed across the board to benefit all tax-payers. The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment,” she said.

The finance minister also rejigged slabs and rates. Under the proposed slabs, people earning more than Rs 12 lakh per annum, there will be nil tax for income up to Rs 4 lakh, 5 per cent for income between Rs 4 and 8 lakh, 10 per cent for Rs 8-12 lakh, 15 per cent for Rs 12-16 lakh. A 20 per cent income tax will be levied on income between Rs 16 and 20 lakh, 25 per cent on Rs 20-24 lakh and 30 per cent above Rs 24 lakh per annum.

“Democracy, Demography and Demand are the key support pillars in our journey towards Viksit Bharat. The middle class provides strength for India’s growth. This government under the leadership of Prime Minister Modi has always believed in the admirable energy and ability of the middle class in nation building,” Sitharaman said in her budget speech.

Fiscal discipline

She also set an ambitious fiscal deficit target of 4.4 per cent of GDP, lower than the previously targetted medium-term goal of 4.5 per cent by 2025-26, as she walked the talk on fiscal prudence as a non-negotiable aim.

The lower fiscal deficit—short hand for the amount of money the government plans to borrow to fund its expenses—comes despite pencilling in an increased annual expenditure, which is projected to rise by 6.9 per cent to Rs RS 50.63 lakh crore for 2025-26 from the revised estimates of Rs 47.16 lakh crore in 2024-25.

The government's fiscal carefulness is underpinned by its focus on enhancing revenue collections, with projected tax revenues (net) of Rs 28.37 lakh crore, representing an 11 percent increase from the revised estimates for 2024-25.

Sitharaman's budget demonstrates a careful balancing act, juggling the need for fiscal discipline with the imperative of addressing socio-economic priorities. The government's commitment to fiscal responsibility is evident in its efforts to contain the primary deficit to 0.8 per cent of GDP, lower than the 1.3 per cent estimated for 2024-25.

Farm focus

The finance minister also announced a slew of steps to boost the farming sector as also boost rural consumption through measures such as enhanced credit access, a renewed focus on pulses, and targeted support for aspirational districts, all of which are expected to bolster farm incomes and thereby increase spending in the rural areas.

The Prime Minister Dhan-Dhaanya Krishi Yojana, which through the convergence of existing schemes and specialized measures, is expected to cover 100 districts with low productivity, moderate crop intensity and below-average credit parameters, thus benefitting 1.7 crore farmers.

Additionally, a six-year mission has been launched to achieve self-reliance in pulses, with a particular focus on tur and masoor, further supporting agricultural growth. Centre has also enhanced the short-term loan limit under the Kisan Credit Card (KCC) scheme from Rs 3 lakh to Rs 5 lakh for 7.7 crore farmers, fishermen, and dairy farmers.