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Budget 2025: Aims for expansion in consumption demand through tax reforms
Equities, Markets - February 3, 2025

Budget 2025: Aims for expansion in consumption demand through tax reforms

Budget 2025: Aims for expansion in consumption demand through tax reforms

With the aim to give relief to the middle class population of India and to also boost consumption and savings in the country, the finance ministry declared tax relief to income upto Rs. 12.75 lakh in the Budget 2025. Consumption is one of the important factors for the growth of the country.

Many reforms were taken into consideration in the current budget which ranges from boost to the agricultural sector, MSMEs, electronics, leather and toy industry. However, the one which gained the most significance was implementation of tax relief reform. It came with the idea to increase the disposable income of the consumer which in turn will expand consumption levels in the economy. This relief is expected to result in a reduction of higher than 100,000 crore of direct tax collection.

Along with reduction in taxes, the government focuses on capital expenditure of about Rs. 11.2 lakh crore for the financial year 2026. It aims to reduce fiscal deficit and bring fiscal consolidation in the economy.

The government aims to take steps for boosting consumption demand in both urban and rural areas.

Elimination of Generation disparity
The tax reforms by raising the limits for both tax collection and tax deduction have resulted in benefits for different generations of the population. It is able to address the demands and needs of different ranges of population. The tax exemption turned out to be good for both landlords and the senior citizen population in the country due to the rise in the tax deductions limit. For instance, the senior citizen can avail benefits from interest income till Rs. 1 lakh , which is present only Rs. 50,000 without tax deductions. It will not only give senior citizen population more money for use but also increase deposit and enhance credit to deposit ratio of Indian banks. In case of landlords, it gives tax exemption rise to 6 lakh compared to current Rs. 2.4 lakh annually. It will boost the rental market in the country, particularly metro cities around India.

It is helpful for parents sending their wards to foreign countries for acquiring education and for travellers also due to the rise in the limit of tax collection. The changes are made in the liberalised remittance scheme as a rise in tax on Rs. 10 lakh which is currently Rs. 7 lakh. In the current budget, tax on education loans are eliminated completely.

Also, more people are expected to opt for the new tax regime which is anticipated to be 63 million for the financial year 2025 and higher in the upcoming financial year 2026.

Impact of the tax relief
High disposable incomes encourage the purchasing power of the consumers in the economy. Its benefits to the population is better accessibility to expensive healthcare facilities and education, and also to essential commodities.

It will promote growth of major sectors like Hospitality, Auto, Travel and Leisure, FMCG and Automobile. It will also bring growth in the BFSI sectors in terms of credit creation and credit cards.

The staple firms are considered to mostly get the advantage of the expansion in disposable income. The reason for this is people shift towards purchasing important commodities. Along with this, consumer segments like liquor, quick service restaurants (QSR) and innerwear anticipated to observe a rise in consumption demand. The most significant one was relief to cigarette manufacturers due to no hike in taxation rates.

Challenges in the economy
The rise in disposable income can lead to change in the historical trend of tax-saving schemes. The current reform can certainly create a hike in consumption levels but it can also affect the growth of the economy in the long-run. The historical trend of NPS has indicated that it not only helps a person but also enhances the benefits of the nation.

Even though the reason behind taxation relaxation is to raise consumption level, the questions arise of whether consumers would really spend their incomes. In the scenario of tax cuts, the capex plan of the government slightly increased to about Rs. 11.2 lakh crore compared to previous capex of Rs. 11.1 lakh crore. It indicates restricted growth in capital goods and infrastructure sectors of India. Consumer-driven sectors is likely to earn more than infrastucture and capital goods sector. Reduction in capex does not promote growth in the economy like increase in capex does. Thus, reduction in capex is a more crucial subject for the economy than the relaxation of taxes for the population.

Impact on the market
In the trading session of the 2nd February, the consumption-driven stocks observed a surge in the market. Many investors believe that the rise in disposable income will lead to a hike in consumption level in consumer products, electronics, cars and other non-essential products.

In the market, Nifty Auto index and Nifty Realty index surged to 1.9 percent and 3.4 percent, respectively. Also, both the Consumer Durables index and FMCG index recorded a rise of around three percent. In contrast to this, the benchmark Nifty recorded a fall by 0.1 percent in the market.

In terms of stocks of the companies, the expansion in the stocks of Zomato and Dmart by 6.7 percent and 8.7 percent, respectively. Also, companies like Tata consumer, ITC, Bajaj Auto, Maruti Suzuki, and Eicher Motors recorded a rise in the market in the range of 3 percent to 5 percent.

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Stimulate Economic growth by tax relief, deregulation, and expansion of capex

Stimulate Economic growth by tax relief, deregulation, and expansion of capex

Overview
Chairman and managing partner of EY India, Rajiv Memani stated that to boost economic growth in India, the government of India has to focus on factors such as deregulation of firms, tax relief to population on their personal income, expansion of capital spending, and also improvement in the business-friendly environment in India.

He further states that if the government of India implements these factors, and also raises funds from capital markets or disinvestments, it will help to observe if these factors can be implemented at faster speed to boost economic growth in the country.

Reason for weak economic growth
In recent times, the economic growth has weakened. The reasons for this are seasonal variations in several industries, and uncertainty among investors due to general elections. Apart from this, it is due to a number of geopolitical tensions in the world leading to an impact on pricing of international products. This has ultimately resulted in affecting the growth of GDP in India.

Steps to be taken for boosting economic growth
During the past few quarters, growth of India’s GDP has faced a slumping trend. The country’s annual growth is expected to grow by about 6.4 percent. Also, the budget 2025 is anticipated to have some capital spending plans which will help to boost the investment cycle in the economy and in turn stimulate economic growth of India.

In the previous six months, the lower consumption levels have resulted in slowdown in economic growth. He further states that tax relief in personal income will help stimulate consumption levels in the market. It will give relaxation to economic classes such as the middle-income and lower income population living in urban areas and also to the population living in rural areas. However, the government of India needs to make sure that it fulfills its promise of sustaining fiscal deficit at low levels, while implementing tax relief.

Adoption of ease of doing business and deregulation in the economy will also aid India’s GDP growth. Memani supported this idea with the plans of Trump 2.0 to lower the intervention of the federal government. He also believes that this will become a pattern followed by many countries in the world. He thinks that countries around the globe will take actions to make business easier to operate in the country. In present times, there are many regulations and requirements of approval to operate or start a business. Also, the process of finalisation of capital expenditure plans is also slow. If measures are taken to reduce this, it will help in boosting the economic growth in the country.

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Infrastructure Expectation in Budget 2025-26

Infrastructure Expectation in Budget 2025-26

Overview and Current Scenario
India’s economic development in FY25 was hindered by limited public capital expenditure (capex), which was mostly caused by limitations associated with the election. Project execution was hampered by the Model Code of Conduct’s implementation during the state and parliamentary elections, especially in the first half of FY25, when total government capital expenditures fell 12.7% year over year.

In Q1 of FY25, the central government’s capital expenditures fell 35 percent year over year. In Q2, they recovered moderately, rising 10.3 percent year over year. Furthermore, state governments’ emphasis on populist welfare programs, which sparked discussions about fiscal discipline, also reduced the amount of money available for infrastructure projects. With just a few state elections scheduled for 2025, public capital expenditures are expected to pick up steam again, propelling advancements in areas like ports, roads, defense, and electricity.

Capex Trend
Infrastructure is still a priority even though capital spending (capex) has decreased by 12.3 percent year-to-date from April to November of FY25. Only 42% of the allocated capital expenditures had been used by November, down from 51% in FY24. This suggests a large backload of spending that is anticipated to occur in the second half of the fiscal year.

Q3 Results might lead to an increase in capex
Strong Q3 ordering activity points to a possible change in momentum as the fiscal year goes on. The government has made significant announcements about trains, defense, and power.
According to ICRA’s note, the significant projected shortfall in FY2025 (Rs 9.7 trillion) compared to the target (Rs 11.1 trillion) would allow for a 12–13 percent increase in FY2026 capital expenditures, or Rs 11 trillion, which would support growth in the upcoming fiscal year and crowd in private capital expenditures.

Sectoral Capex Increment in the Budget
In order to control inflation and the budgetary crisis, the government has been selectively prioritizing a small number of projects and sectors in order to reduce expenditure. Despite the bunching of a few orders in the remaining months of the current fiscal year, the government might still fall short of its initial capital expenditure targets given the current run rate. There are already rising expectations that the government will increase its capital expenditure budget for the upcoming year.

The Union Budget 2025–26 is anticipated to address these gaps with increased capex. The focus will likely be on sectors with high economic multiplier effects and a proven capacity for timely project execution, more so in the light of supporting economic growth. India’s GDP growth slowed to an estimated 6.4 percent in FY25, the weakest in four years, due to global headwinds and subdued private investment.

But in FY26, GDP growth is expected to rebound to 6.5–6.8 percent. For example, FICCI has suggested a 15% increase in capital expenditures for FY26 in order to sustain economic momentum, with a focus on investments in productive infrastructure that create long-term growth and jobs. It is anticipated that significant financial investment will be made in the fields of highways, railroads, defense, and renewable energy, just as in the past. Additionally, in anticipation the federal government will keep pushing states to undertake important infrastructure projects by allocating funds.

Ernst & Young Report on Infrastructure Sector Expectation from the Budget
According to EY, the shortfall will need to be made up in FY26 because the capital expenditure was significantly lower in FY24 due to the election. India’s goal of becoming a $7 trillion economy by 2030 is predicted to require $2.2 trillion in infrastructure investment, underscoring the necessity of enacting strong fiscal policies. Spending on infrastructure also frequently has a multiplier effect, with each rupee spent having a threefold effect on GDP. Public-private partnerships (PPP) in major projects involving ports, airports, roads, etc., require a renewed focus and innovative policy. This can be achieved through enhanced measures for viability gap funding (or “VGF”) and supportive policies and regulations.

Tax measures to boost infrastructure
Some of the tax measures to be implemented to support infrastructure include establishing a framework for fiscal consolidation for intragroup Special Purpose Vehicles (SPVs) that permits the offset of losses from one SPV against gains from other SPVs; reduced tax rates under a special and simplified tax regime for green energy and infrastructure projects; encourage business involvement in large-scale space initiatives through tax breaks; introducing a favorable tax framework for carbon credits; offshore wind projects were the focus of the VGF, but this would not be feasible without the importation of foreign cash, technology, and expertise. It would be beneficial to simplify the tax code for these kinds of initiatives.

Conclusion
It is highly anticipated that Budget 2025 would introduce a number of programs to accelerate the development of infrastructure. Private participants would be encouraged to plan their involvement if ambitious asset monetization programs received additional advice.

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