Advertisement
X

Union Budget FY25: Can Sitharaman's 7th Budget Spark a Surge in Private Consumption?

The Union Budget presented by Nirmala Sitharaman on Tuesday clearly indicated that the government is unwilling to sideline fiscal consolidation pathway alongside reviving consumption demand. But will it ignite a spending revival?

The Union Budget for FY25 was perhaps a mixed episode for this fiscal season. After the NDA government came to power for the third consecutive term, albeit with a lesser majority, word of the street loomed that fiscal consolidation might take a back seat with populist measures at the forefront. While experts are still divided on the view post-budget, a common roadway of thought is India's continuous growth trajectory and how it can be sustained.

Advertisement

The GDP figure stood above the 8 per cent mark in three out of four quarters of FY24. The Economic Survey projects the real GDP figure to grow anywhere between 6.5-7 per cent in 2024-25. Meanwhile, Indian exports reached a new high at $341.1 billion and forex reserves are sufficient enough to cover 11 months of projected imports. The concerning part of this euphoric image is private final consumption expenditure (PFCE), which grew by just 4 per cent in FY24.

Notably, private consumption is the largest contributor to economic growth, accounting for nearly 57 per cent of India's GDP. While Nirmala Sitharaman's recent budget presented some major proposals to reignite private consumption, whether it will bring in structured changes remains a question.

A Bid to Revive the Consumption Ball

From rural infrastructure outlay to employment push, the base of this year's budget did try to bounce the private consumption ball to revive the demand cycle.

Advertisement

This was perhaps the first time, a scheme was introduced for the new entrants in the job market. "Direct Benefit Transfer of one month's salary in three installments to first-time employees as registered in the EPFO will be up to Rs 15,000. The eligibility limit will be a salary of Rs 1 lakh per month," Nirmala Sitharaman said in her budget presentation.

On the rural and welfare side, the budget has allocated Rs 1.52 Lakh crore for agriculture and allied sectors. Additionally, Rs 2.66 Lakh crore has been set aside for rural development and infrastructure.

Multiple schemes were introduced, including the construction of nearly 3 crore houses under the PM Awas Yojana in both rural, urban areas and a collateral-free credit guarantee scheme for manufacturing to support MSMEs.

India ratings and research pointed out in a post-budget note that budgetary allocation to newly announced schemes will not only help generate more employment opportunities in the economy but also broad base the consumption demand/expenditure.

Advertisement

“While the focus on agricultural schemes will boost spending in non-metro markets and rural areas, investment in job creation, skill upgrade and MSME development will support consumption in urban areas,” said Asif Malbari, chief financial officer of Godrej Consumer Products.

On the taxation side, the government has revised the initial tax slabs. Under the new taxation policy, a 5 per cent tax will be levied on income between Rs 3 lakh and Rs 7 lakh, 10 per cent on income between Rs 7 lakh and Rs 10 lakh, and 15 per cent on income between Rs 10 lakh and Rs 12 lakh.

Under the old regime, a 5 per cent tax was levied on income between Rs 3 lakh and Rs 6 lakh, and 10 percent on income between Rs 6 lakh and Rs 9 lakh.

Sithraman stated in her speech that taxpayers could save nearly Rs 17,500 under the new tax regime.

Advertisement

Another relief to taxpayers was provided in the form of increasing the standard deduction from Rs 50,000 to Rs 75,000. Both these measures can potentially help revive the consumption demand by reducing the taxable amount in the pockets.

Balancing Out the Taxation View

While there has been a push for consumption, it is worth pointing out that allocation towards rural, welfare and transfer payments have plummeted by 10 bps each compared to FY24 as per a report by Goldman Sachs.

It wasn't all rosy on taxation as the budget called for an increase in capital gains tax. Both LTCG (Long-term capital gains) and STCG (Short Term Capital Gains) witnessed a surge to 12.5 per cent and 20 per cent, respectively.

Elara Capital said in a note that restrained populism of the government in the budget is unlikely to lift consumption meaningfully. "The recent electoral verdict moreover had created expectation of an enhanced transfer to rural and urban poor. While the budget did prop those under the new tax regime (Rs 17,500) and through job creation schemes, the allocation towards rural-focused sectors fell by 0.3 per cent versus FY24 (RE)."

Advertisement

After suffering a shock in the General Elections 2024, there were expectations that Modi 3.0 will go all out on boosting consumption. While FM Sitharaman has heeded the calls to pump up consumers with some policies, the jury is still out to figure out whether they will be enough.

Show comments