Two big-picture themes from this Budget

One of the two macro themes for the world of business from India’s latest Budget is the Government’s recognition of the need to leave more money in the hands of the country’s large middle class. 

Under a new tax plan, those earning up to Rs 12 lakh won’t have to pay any income tax. Earlier, it was at an income of Rs 7 lakh that one didn’t have to pay any tax. The zero-tax limit is Rs 12.75 lakh for salaried tax payers, what with the standard deduction being Rs 75,000.

“Slabs and rates are being changed across the board to benefit all taxpayers,” said Finance Minister Nirmala Sitharaman at the fag end of her 77-minute speech, delivering her eighth Budget. 

The voices for relief for the middle class, which began right after the NDA performed below expectations in the 2024 polls, have become loud in recent weeks. It was even part of the Budget wishlist of BJP’s ideological parent RSS.

Beyond the politics of it, the economic logic lies in the fact that this will potentially give India’s middle class enhanced spending power. Sitharaman stated that the move will boost “household consumption, savings, and investment.”

This is important, as India, though still the fastest-growing economy in a world that’s battling immense uncertainty, has shown signs of slowing down. And in good measure, the reason has been attributed to slowing consumption.  

An economic report by Punjab National Bank last year spoke about “notable shifts and challenges in Private Final Consumption Expenditure.” 

It said, “Historically, PFCE growth was closely aligned with GDP growth until FY 2022-23, when a notable divergence occurred. During FY 2023-24, PFCE growth slowed to 4 percent, down from 6.8 percent in the preceding year.” PFCE’s share of GDP was 55.8% in FY 2023-24, compared to 58.1% in 2021-22. 

As a Reuters report last month noted, this slowing down has been evident in recent trends around eating out and car sales.  

The Economic Survey, released on Friday, recognised that while there was a growth impulse from rural demand, “indicators of urban demand presented mixed trends.” It cited data from the Federation of Automobile Dealers Associations to show that growth of passenger vehicle sales has slowed down to 4.2% in April-November 2024 compared to 9.2% in the corresponding period of the previous year. 

FMCG sales in urban areas, it said, recorded moderate growth in the first half of this financial year. At the same time, air passenger traffic showed healthy growth.  

The tweaking of the tax slabs to the advantage of the taxpayer is all the more important given that, as the Reuters report pointed out, the job market out there is weak, incomes aren’t rising fast enough, and consumer credit has fallen. 

The tax sop is a typical demand-led growth idea, with the expectation that this would lead to enhanced consumption, which would then spur businesses to invest to meet the higher demand. The investments could then lead to more jobs and higher incomes. 

Startup categories such as ecommerce could benefit from the consumption boost that comes with the tax slab change. 

Light-Touch Framework

The second big takeaway is the Government’s intent to pull back from too much regulation. Sitharaman said, “We are determined to ensure that our regulations must keep up with technological innovations and global policy developments. A light-touch regulatory framework based on principles and trust will unleash productivity and employment.”

One of the four measures to achieve this is the setting up of a high-level committee, which will review all the regulations, licences and certifications in the non-financial sector. Its recommendations will be available in a year. 

Other measures include a review of financial regulations, the launch of an investment friendliness index of States, and a further act of simplification and decriminalisation of legal provisions. 

The closest policy prescription for the above was what yesterday’s Economic Survey referred to as “getting out of the way.” It had said, “‘Getting out of the way’ and allowing businesses to focus on their core mission is a significant contribution that governments around the country can make to foster innovation and enhance competitiveness.” That means, it said, rolling back regulation significantly. 

The survey recognised the difficulty of acting on the ‘getting out of the way’ philosophy in hierarchical societies. But, “we have no other choice,” it said. While recognising that trust is a two-way street, the survey noted that “wiping out the trust deficit in the country is imperative and government agencies have to set the agenda in this regard.” 

This is a useful path to take, given that Indian startups often have to confront a complex regulatory environment, especially in their early years.