The Reserve Bank of India, in its latest bulletin, released on February 19, stated that the tax cuts announced in the Union Budget 2025 and moderating inflation are expected to boost household consumption. This was reiterated by newly-appointed RBI Governor Sanjay Malhotra in the February Monetary Policy Committee meeting announcements.
“On the direct tax front, the Budget proposes tax relief of Rs 1 lakh crore focused on middle-class taxpayers, which is expected to bolster household disposable incomes, and stimulate consumption, savings, and investment. In the realm of indirect taxation, revised customs duties target tariff simplification and address duty inversions,” stated the bulletin in an assessment of the Union Budget 2025.
It stated that the gross tax-GDP ratio is budgeted to increase to 12 per cent in 2025-26, which is the highest post 2007-08.
“The tax relief is expected to enhance disposable incomes and provide a boost to household consumption and investments,” it said. The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman on February 1, raised the tax-free income limit from Rs 7 lakh to Rs 12 lakh under the new tax regime.
The income tax slabs have also been revised across all income brackets. The total revenue that the government will forego is estimated to be around Rs 1 lakh crore in direct taxes, and Rs 2,600 crore in indirect taxes.
The RBI bulletin stated that Union Budget 2025 has placed thrust on boosting consumption while maintaining the quality of expenditure with effective capital expenditure/ GDP ratio budgeted to improve to 4.3 per cent in 2025- 26 from 4.1 per cent in 2024-25 (RE).
In the February MPC, Governor Malhotra had stated that “rural demand continues to be on an uptrend, while urban consumption remains subdued with high frequency indicators providing mixed signals”. “Going forward, improving employment conditions, tax relief in the Union Budget, and moderating inflation, together with healthy agricultural activity bode well for household consumption,” he had said.
The MPC, in its statement, had also said that “household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26”.