Strengthening Household Spending and Small Business Growth: A Closer Look at 2025 Budget Reforms

Rajan Pental Executive Director YES BANK

Rajan Pental, Executive Director at YES BANK

The 2025 budget introduces progressive and forward-thinking fiscal measures to unlock new opportunities for domestic consumption and strengthen India’s thriving micro, small, and medium enterprises (MSMEs). With Q2FY25 growth progressing at 5.4% and the economy adapting to evolving wage dynamics, the government has taken proactive steps to empower households, fuel entrepreneurship, and drive business expansion, paving the way for a more dynamic, resilient, and prosperous future.

A New Tax Regime for Middle-Class Incomes

A central feature of the budget is the revision in the personal income tax structure. With the tax exemption threshold raised to Rs. 12 lakhs, individuals earning up to this limit now retain a larger share of their earnings. For example, a taxpayer with an income of Rs. 12 lakh will enjoy a reduction in tax liability by approximately Rs. 80,000, while someone earning Rs. 50 lakh can expect savings of about Rs. 1,10,000. This adjustment is expected to translate into higher disposable incomes, which in turn may drive an uptick in consumer loans—especially among prime and super prime borrowers who often channel additional funds into asset creation, notably in housing. Moreover, even as some households may allocate part of the benefit to savings, the overall effect should alleviate the deposit shortage that has long challenged the banking sector.

Consumption as a Growth Driver

The increased disposable income from tax relief is anticipated to have a ripple effect on consumption. Households, especially those in the middle-income bracket, are likely to channel extra funds toward both debt repayment and increased spending. With consumer sentiment buoyed by the tax cut, there is potential for an acceleration in credit uptake in the consumer loan segment. This, in turn, is expected to contribute to greater deposit accumulation at banks—a welcome development amid ongoing challenges in sourcing funds.

Recalibrated MSME Criteria and Enhanced Credit Access

On the business side, the budget introduces sweeping changes to the MSME classification thresholds. By increasing both the investment limits and turnover ceilings by 2.5 and 2 times respectively, a greater number of enterprises can now remain within the MSME ambit. This regulatory adjustment enables companies to expand operations without forfeiting the advantages that come with MSME status—advantages that include preferential tax treatments and access to specialized credit facilities.

Complementing these changes, the budget raises the credit guarantee cover for micro and small enterprises from ₹5 crore to ₹10 crore. This measure is estimated to unlock an additional ₹1.5 lakh crore in credit over the next five years. For startups—particularly those aligned with initiatives such as “Make in India”—the guarantee limit rises from ₹10 crore to ₹20 crore. In addition, a tailored credit card for micro enterprises will provide a ₹5 lakh limit via the Udyam portal, potentially reaching one million users in its first year. Such measures are expected to ease the financing constraints that have historically limited the growth of MSMEs, which currently account for roughly 36% of manufacturing output and 45% of exports.

Sectoral Initiatives and Broader Economic Implications

The budget also places considerable emphasis on labor-intensive industries such as toy manufacturing, footwear and leather, and food processing. By addressing the specific needs of these sectors—through measures such as improved storage infrastructure, streamlined logistics, and targeted capital support—the government aims to raise productivity and generate employment. Enhanced production and modernization in agriculture, coupled with better connectivity and upgraded farm practices, should help raise incomes among rural households and extend formal credit to segments that have traditionally been underserved.

From a longer-term perspective, the overall strategy is to expand the economy’s productive capacity while stimulating immediate consumption and private investment. The focus on increasing capital expenditure—while consolidating the fiscal deficit to 4.4% for FY26—reflects a balanced approach that addresses both near-term challenges and structural growth imperatives.

Implications for the Banking Sector

For financial institutions, these measures open several promising avenues. A broader MSME base, operating under revised criteria, translates into a larger and more formalized segment for credit expansion. Improved risk-sharing through enhanced credit guarantee schemes reduces exposure to non-performing assets. Simultaneously, rising consumer spending is expected to drive deposit growth, thereby stabilizing bank funding. Finally, digital initiatives—such as the integrated export platform—offer banks opportunities to innovate in trade finance, further integrating them into the MSME ecosystem.

Conclusion

The 2025 budget introduces a dual-engine strategy: raising disposable incomes through tax relief to stimulate consumer spending and recalibrating MSME parameters to enable business expansion. This approach is designed to reinvigorate domestic demand while laying a foundation for broader economic growth. As these policies take effect, the financial sector stands to benefit from a more vibrant credit landscape and improved deposit inflows—elements that are crucial for sustaining long-term growth and ensuring economic resilience.

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