Will FM Nirmala Sitharaman’s gamble to boost consumption in Union Budget 2025-26 pay off?

Globally, the political and economic landscape has also witnessed a sharp shift after elections in the US brought Donald Trump back as the President with a renewed pledge to Make America Great Again. His tariff and tax measures would affect people and goods across the world. The new order is visible in the tariffs he has imposed on Canada, Mexico and China, the strengthening of the US dollar and volatile equity markets.

“The passing of the era of rapid world trade growth clouds the outlook for India’s export growth because, historically, India’s export growth has been a high beta play on global export growth. This means domestic growth levers will be relatively more important than external ones in the coming years,” stated the Economic Survey 2024-25, presented just before Union Budget 2025-26. It has projected GDP growth in the 6.3–6.8% range in FY26, after an estimated 6.4% this fiscal.

Finance Minister Nirmala Sitharaman’s Union Budget 2025-26 tried to take these problems head on and prioritised boosting domestic growth by focussing on four key themes: agriculture, micro, small and medium enterprises (MSMEs), investment, and exports.

For businesses to be able to work better, the Budget also took the advice from the Survey for deregulation and to “get out of the way”. The Finance Minister announced light touch regulations in both financial and non-financial sectors “to strengthen trust-based economic governance”, along with other reforms, including the expected 100% foreign direct investment in insurance to whet the appetite of investors. The idea is to cut down compliance burden and cumbersome form filling by businesses to enable them to focus more on their core business of doing business.

Economist Ajit Ranade believes this is one of the most important aspects of the Budget as a comprehensive overhaul of the regulatory system that would cut down the compliance burden for businesses. “If that can be achieved, it would certainly be a huge stimulus for the economy,” he underlines.

A high level committee has been proposed in the Budget to review all non-financial sector regulations, certifications, licences, and permissions and would submit its recommendations within a year. States would also be encouraged to participate in this.

“Consumption, capex, consolidation,” is how HSBC economists summed up the Union Budget 2025-26. “The government walked the tightrope in [the] Budget, balancing several conflicting objectives. It gave a near-equal stimulus to both consumption (personal income tax cuts amounting to Rs 1 lakh crore) and capex (raising Budget outlays by Rs 1 lakh crore), while lowering the fiscal deficit (as promised, to 4.4% of GDP for FY26),” said a report by HSBC Global Research.

Consumption Boost

In contrast to the past, consumption is the biggest takeaway from this Budget with the government choosing to give direct relief to taxpayers through income tax cuts rather than just focussing on indirect means such as a higher capital expenditure (capex) outlay. It announced that those earning up to Rs 12 lakh will not have to pay tax under the new tax regime, up from the earlier rebate limit of Rs 7 lakh.

This has meant that while fiscal consolidation has remained a key agenda, its pace is softer and tax collection targets have moderated marginally.

As per finance ministry estimates, 10 million additional taxpayers will no longer pay tax because of the cut. Finance and Revenue Secretary Tuhin Kanta Pandey expressed hope that all the money that these individuals gain from the tax rebate will come back to the economy in the form of consumption, savings, or investment.

India Ratings and Research expects consumption demand to grow at 6.9% in FY26. Private final consumption expenditure is estimated to grow by 7.3% this fiscal. “The expected income tax relief under the new tax regime would help in boosting the consumption demand of the economy. However, it will take some time before it starts reflecting on consumption growth,” it noted.

Devendra Kumar Pant, Chief Economist at India Ratings & Research, notes that in the absence of substantial wage hikes by the private sector, the government has come to the aid of taxpayers, providing them relief on the income tax front. “No doubt, these measures will boost growth, but it will take some time,” he says.

Kuldip Kumar, Partner at Mainstay Tax Advisors, notes that the Economic Survey had clearly indicated the need to boost consumption, particularly among the urban middle class. “The Budget’s proposals of foregoing Rs 1 lakh crore of revenue to increase the disposable income of taxpayers by providing tax relief, speaks of its focus in this regard. This, essentially, is expected to increase the spending power of India’s middle class and uplift household sentiment,” he said.

Boosting exports

A part from the headline income tax cuts, the Budget took up the theme of Make in India to push domestic manufacturing, including support to MSMEs and exports at a time when US President Trump’s Make in America thrust is gaining ground.

Along with revised criteria for classifying MSMEs and ensuring more credit to them through an enhanced credit guarantee cover, the finance minister has also announced policy and facilitation measures for labour intensive sectors as well as a focussed scheme for India’s booming leather and footwear products sector. Similarly, with the domestic toy-making sector gaining ground after numerous quality control orders that barred cheap imports, the Budget announced a National Action Plan for Toys that would make India a global hub for toys.

The government will also set up a National Manufacturing Mission covering small, medium and large industries for furthering “Make in India” with five focus areas of ease and cost of doing business; future-ready workforce for in-demand jobs; a vibrant and dynamic MSME sector; availability of technology; and quality products.

Cutting Customs

A long with these, the FM also ensured that the promise of rationalising customs duty rates was implemented in this Budget. Experts say this will boost manufacturing and reduce dependency on imports. The changes are in keeping with the changing global trade dynamics.

“The usual narrative, which goes on saying, ‘Is India being too heavy on tariffs?’ No, you find that drastically reduced and simplified,” highlighted the finance minister at a post-Budget press conference.

The Budget has proposed removing seven tariff rates for customs duties, leaving only eight rates now, including the zero rate, and has rationalised rates on several items. Duties on about 40 items have been cut including mobile phone batteries and components, lifesaving drugs, and leather.

Pratik Jain, Partner at professional services firm PwC India, notes that the Budget’s alignment with Make in India agenda is clearly reflected through three broad themes. These include incentivising manufacturing through customs duty reduction on inputs and capital goods in critical sectors such as those with MSME presence (textile, leather, footwear), export push (mobile phone manufacturing), and sectors with green push (EV battery). Further, the tariff structure has been simplified, and the number of tariff rates reduced.

The Budget also took care of long-standing concerns of the US on items such as Harley Davidson motorbikes to make their imports cheaper. The duty on motorcycles of engine capacity less than 1600 cc has been lowered to 40% from the earlier 50%, while for those above 1600 cc, the tariff has been slashed from 50% to 30%.

Pandey points out that India did not have very high tariffs on US products. “On the 13 large products from the US, you would see the important products imported from US on industrial goods, our tariffs are ranging within 10%,” he says. With the Budget exercise, India’s effective tariff rate has been lowered to about 10.6%, which is close to the ASEAN level, he says.

Experts, too, note that the Budget has introduced significant tariff reductions on multiple products. “Among the key tariff reductions, India lowered the duty on fish hydrolysate for the manufacture of aquatic feed from 15% to 5%, a move that directly impacts US exports, which amounted to $35 million in FY24,” noted a report by economic think tank Global Trade Research Initiative.

The Budget Math

Underpinning these initiatives is the Budget math, which continues to focus on fiscal consolidation, albeit at a softer pace. The Centre’s spending on capital asset creation has also moderated and is now seen to be about 3% of the GDP for some time.

With about 8.4% of the estimated capital expenditure of Rs11.11 lakh crore remaining unspent, the capex target for FY25 was scaled down to Rs 10.18 lakh crore in the Revised Estimates (RE). The savings have translated to some improvement in the fiscal deficit that is seen to be contained at 4.8% of GDP in FY25 against the budgeted 4.9%.

For FY26, the government has kept the fiscal deficit target at 4.4% of GDP and capex has been increased by a modest 10% over the RE to Rs 11.21 lakh crore and total expenditure at Rs 50.6 lakh crore. The Budget also outlined a new fiscal consolidation road map that would aim to lower the central government’s debt to about 50% of GDP between FY27 and FY31.

Capex loans to states have been retained at Rs1.5 lakh crore. An amount of Rs 26,549 crore has been allocated for solar energy and the Ministry of New and Renewable Energy, which is 53.48% higher than the Rs17,298 crore allocated in FY25 (RE).

“The revenue expenditure is slightly on the lower trajectory, but capex growth has been quite handsome. The effective capital expenditure will increase to Rs 15.48 lakh in FY26 from Rs13.18 lakh crore in FY25, which is about a 17% growth. It is less than the 25-30% growth in the last few years, yes, but that was in the context of Covid,” says Expenditure Secretary Manoj Govil.

But the revenue numbers seem to have raised more questions with tax collections, especially on the direct tax side, and disinvestment receipts seen to be a tad too optimistic.

Gross tax collections are estimated to rise by 10.9% in the Budget Estimates of FY26 to Rs 42.7 lakh crore from the Revised Estimates of Rs 38.5 lakh crore for FY25. Within tax revenue, direct taxes are budgeted to grow at a higher rate than the nominal GDP, at a buoyancy of 1.3x as against 1.5x in the RE of FY25. Corporate tax growth is estimated to grow by 10.4% in FY26, despite a 7.6% growth in FY25 to Rs 9.8 lakh crore (lower than the BE of Rs 10.2 lakh crore). Personal income tax collections are estimated to rise 14.4% to Rs 14.38 lakh crore in FY26 from Rs 12.57 lakh crore in the RE of FY25, despite forgoing an estimated Rs 1 lakh crore due to the tax cut. It is estimated to grow by 20.3% this fiscal.

The Centre has also pencilled in Rs 2.56 lakh crore as dividend from the Reserve Bank of India and public sector banks in FY26 and Rs 47,000 crore from disinvestment and asset monetisation.

“For the first time in many years, the Centre’s receipt forecasts look aggressive. There are two reasons: with higher tax rebates, budgeted growth of 14.4% year-on-year in personal income taxes looks optimistic, and a growth of 12.3% in dividends may be a challenge even if the RBI transfers dividends worth Rs 2 lakh crore. Overall, we believe there could be a shortfall of Rs 60,000 crore to Rs 80,000 crore in total receipts,” said a report by brokerage Motilal Oswal Financial Services.

Officials have, however, underlined that the Budget targets remain credible and lean on the conservative side.

D.K. Srivastava, Chief Policy Advisor at consultancy firm EY India, agrees and says that he does not see any great overestimation in the Budget Estimates for FY26, except for the corporate tax projections. “Given that corporate tax collections are subdued even in FY25 with a buoyancy of 0.78, the Budget has estimated a corporate tax buoyancy of 1.03 in FY26,” he points out.

But will these initiatives return the economy to 7% growth?

Srivastava believes that growth will be on the lower end of the spectrum of the Survey’s projection. Nominal GDP growth may also be lower than the projected 10.1% in FY26, he says.

“While there may be some consumption stimulus from the announcements, the impact will be limited on growth as total expenditure growth, including capital and revenue expenditure, is seen to slow down in FY26,” Srivastava says.

Pant of India Ratings and Research says the agency has estimated GDP growth at 6.6% for FY26. “We will evaluate the impact of the Budget measures, the monsoon rainfall and how global conditions pan out in the next few quarters before we take a call on revising the growth estimate,” he adds.

Ranade says the multiplier effect of capital expenditure is usually much higher than that from a consumption stimulus. However, there has been a concern that consumption spending is moderating and so there was a need for a tax cut. “Overall, the consumption stimulus will have some impact on growth. But its multiplier effect might be less than 1,” he notes.

Ranade says one strong signal is fiscal restraint. “The fiscal deficit target has been brought below 4.5% as promised, and that also is good news for the bond markets. Bond yields, interest rates and possibly inflation would ease giving space for a monetary stimulus including a rate cut,” he says.

The FM and her team have done their bit. The wheels of the economy have to turn now.