By The Straits Times | Created at 2025-02-01 15:07:17 | Updated at 2025-02-01 18:51:16
3 hours ago
NEW DELHI – The Indian government has slashed income tax rates for individual taxpayers in its new budget in an effort to boost household savings and promote consumption aimed at revitalising the world’s fifth-largest economy.
On Feb 1, Minister of Finance Nirmala Sitharaman, while presenting her budget for FY2026 in the Indian Parliament, said those earning up to 1.2 million rupees (S$18,817) annually will effectively no longer pay income tax.
This threshold was lower before at 700,000 rupees.
Acknowledging that the Indian middle class “provides strength for India’s growth”, Ms Sitharaman also reduced income tax rates for those earning more than 1.2 million.
“The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment,” said Ms Sitharaman.
A tax relief measure was widely expected, with household savings plummeting to a five-year low in the 2023 fiscal year and poor consumption demand becoming a drag on economic growth.
Parliamentarians from the Bharatiya Janata Party (BJP) greeted the announcement with cheers and thumped their desks loudly, while Indian social media erupted in celebration.
This budget was the first from the current Narendra Modi-led government after he was sworn in as the prime minister for a third term in June 2024 with a reduced mandate that saw his party even lose its majority in Parliament as lack of jobs, high inflation and falling income levels led voters to rein in support.
GDP growth in India is expected to slow down to 6.4 per cent in the 2025 fiscal year, the slowest in four years.
The government’s Economic Survey tabled on Friday projected this growth would range from 6.3 to 6.8 per cent in the 2026 fiscal year, suggesting continued sluggish economic growth amid frail urban demand as well as weak manufacturing and private investment.
These growth figures are lower than the sustained economic growth of close to 8 per cent for at least a decade that the Economic Survey prescribes for India to achieve Prime Minister Narendra Modi’s ambitious goal of becoming a developed country by 2047.
Growth may also be further hampered by possible trade tariffs on the goods exported to the US that President Donald Trump has threatened to impose, crimping economic progress in Asia’s third-largest economy after China and Japan.
Ms Dipti Deshpande, principal economist at analytics firm Crisil, told The Straits Times that tepid consumption demand has been one of the factors deterring private investment, something the budget seeks to correct with its tax rebates.
“This will support consumption in the short term and by doing so it also tries to push private sector investment in some ways because if they see consumption coming, they might want to go out and invest,” she noted.
The multiple tax relief proposals are expected to lead to a revenue loss of about one trillion rupees in direct taxes and 26 billion rupees in indirect taxes, but Ms Deshpande added she expected “no major hit to government revenues” because the tax base has been widening with an accompanying growth in income tax receipts.
Fiscal consolidation has been a key focus, and the government has targeted a fiscal deficit of 4.4 per cent of India’s GDP in the 2026 fiscal year, down from a revised 4.8 per cent for FY25.
In her budget speech, Ms Sitharaman identified “four powerful engines” of growth - agriculture, micro, small and medium enterprises (MSMEs), investments and exports, with multiple measures announced to try and boost each of these four sectors.
The government will launch a programme to enhance agricultural productivity in 100 districts, besides promoting crop diversification and sustainable agriculture practices. Rural growth received a fillip too with the limit for subsidised credit for farmers being raised to 500,000 rupees from 300,000 rupees earlier.
The budget also announced missions to boost the production of pulses and develop climate-resilient high-yield seeds, something that could help tackle food inflation, which remained high at 8.39 percent in December 2024.
It also promises better credit access for MSMEs as well as a new scheme for 500,000 first-time women entrepreneurs, especially those from marginalised groups, with loans up to 20 million rupees for the next five years.
A slew of measures was also included to boost investments in human resource development – such as the creation of five “National Centres of Excellence” for skills training – as well as in innovation with an allocation of 200 billion rupees for private sector-driven research and development.
Job creation also received priority with efforts aimed at boosting economic activity in labour-intensive sectors such as leather and textiles.
Tax reform measures were included as well, aimed at supporting domestic manufacturing capacities to help integration with global supply chains.
To enhance India’s investment appeal, the government announced the creation of a committee tasked to come up with recommendations to strengthen “trust-based economic governance” and enhance the ease of doing business.
A revamp of the current model of its Bilateral Investment Treaty is also in store.
Mr Sanjeev Dasgupta, CEO, CapitaLand Investment (India), said in a statement that the move is “a welcome step towards providing greater clarity and confidence to global investors”.
He added: “By fostering a more predictable and investor-friendly environment, India is sending a strong message that it is open to sustained long-term capital.”
Opposition parties have, however, been critical.
Congress member of Parliament Dr Jairam Ramesh said the budget had done “nothing” to address “four related crises” in the Indian economy – stagnant real wages, lack of buoyancy in mass consumption, sluggish rates of private investment, and a complex and complicated goods and services tax regime.
“The only relief has been for income tax payers. What actual impact this will have on the economy remains to be seen,” he added on X.
Several announcements were also dedicated to Bihar, a key north Indian state where the BJP shares power with a regional party and where assembly elections are scheduled to be held anytime between October and November.
They include the creation of greenfield airports, a new technical education institution as well as one to boost food processing activities in the state and the adjoining region.
A greenfield airport is one that is constructed from scratch on previously unused or undeveloped land.
Accusing the government of ignoring other states, Congress MP Manish Tewari questioned if it was “a budget of the government of India or a budget of the government of Bihar”.
“Have you heard the name of another state than Bihar in the entire budgetary speech of the union finance minister?” he told news agency ANI.
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