India Cuts Income Tax to Boost Middle-Class Spending, Unveils Growth-Oriented Budget

India is set to cut personal income tax rates to enhance the spending power of the middle class, Finance Minister Nirmala Sitharaman announced while presenting the annual budget for 2025-26. The budget also aims to encourage private investment to strengthen economic growth, as the country prepares for its slowest expansion in four years due to weak urban demand and sluggish private sector spending. Rising food inflation has further reduced disposable incomes, making financial relief measures crucial.

The new tax policy raises the exemption threshold from 700,000 rupees to 1.28 million rupees ($14,800) per year, allowing a larger section of the population to avoid tax payments. Additionally, tax rates for those earning above this limit have been reduced, with the measures expected to cost around 1 trillion rupees in tax revenues. Despite these cuts, the government remains focused on fiscal discipline, setting a deficit target of 4.4% of GDP for 2025-26, down from 4.8% in the current year. To finance the fiscal gap, India plans to borrow 14.82 trillion rupees ($171 billion) through bond markets. Capital spending will see a modest increase to 11.21 trillion rupees in 2025-26 from a revised 10.18 trillion rupees this year.

India’s chief economic adviser, in a report released a day before the budget, projected sluggish economic growth for the upcoming fiscal year and emphasized the need for long-overdue reforms in land and labor laws to drive long-term expansion. While the current growth rate aligns with the decade-long average, experts argue that an 8% growth rate is essential for achieving India’s economic ambitions and generating employment for its large youth population. Economists have also suggested reducing the burden on individuals by implementing tax cuts on income and energy products, in addition to expanding the $24 billion job creation program introduced in the post-election budget last July.

As the budget was presented, Indian stock markets showed volatility, with the Nifty 50 and BSE Sensex fluctuating between gains and losses. As of 12:23 p.m. IST, both indices were trading down by 0.1%, with Nifty at 23,491 points and Sensex at 77,443 points.

Inflation remains a key concern, particularly in the food sector, where prices have surged over the past year. While retail inflation eased to 5.2% in December, food inflation remained high at 8.39%. In response, the government plans to launch a national mission focused on boosting high-yielding crops, particularly pulses and cotton, to increase agricultural productivity. The limit for subsidized credit available to farmers has also been raised from 300,000 rupees to 500,000 rupees ($5,778) to provide additional support.

Manufacturing and exports remain priorities, with the government planning new initiatives to stimulate growth in these sectors, though details were not provided. Despite long-standing ambitions to expand manufacturing’s share of the economy to 25%, it has remained stagnant at around 17%.

To further deepen financial sector reforms, the government has announced an increase in the foreign direct investment (FDI) limit in the insurance sector from 74% to 100%. This move aims to attract more investment and expand insurance coverage across the country. With a mix of tax relief, economic reforms, and investment incentives, the budget seeks to navigate India through economic headwinds while laying the groundwork for long-term growth. Input from Agency