The personal income tax concessions announced by Finance Minister Nirmala Sitharaman in her 8th budget would undoubtedly be the most significant talking point. The increase in the “nil slab” rate from ₹7 lakh to ₹12 lakh would put increased purchasing power in the hands of the middle class which, according to the Finance Minister, is in “recognition of their contribution” in “nation building”.

This is largely true as taxes on income are projected to contribute to more than a third of the gross tax revenue for the first time.

In other words, the middle class would be taking the significantly large burden of supporting government finances during the next fiscal year, up by more than 3 per cent in 2023-24. This shows that though the burden on direct tax has been reducing, income tax payers have been filling up the government coffers more than they have done in the past.

While the government would take plenty of credit for reducing the burden of direct taxes on over 7 crore tax payers in the country (7.28 crore income-tax returns were filed in 2024), it must be pointed out that this move was triggered by the compulsion that the government faces to bolster demand.

The government seems to have finally admitted that demand deficiency is indeed a problem that needs to be corrected before the growth slowdown deepens further.

Last month, the National Statistics Office had unveiled first advance estimates of the GDP for the 2024-25 fiscal showing that the economy could grow at 6.4 per cent, nearly 2 per cent slower than that in the previous year.

With the second quarter of FY25 registering 5.2 per cent growth, the slowest growth in six quarters, almost 3 percentage points slower than the corresponding period of the previous fiscal year.

Sales slide

By the end of 2024, there were clear indications that a demand slowdown was adversely affecting the Indian economy. Sales of products ranging from cars to biscuits decreased. Automobile sales were on a declining trend since the end of 2023 but after the middle of 2024, the decline became steep.

By December 2024, automobiles sales dipped to negative territory on a year-on-year basis. FMCG companies, on the other hand, are expected to register low single digit growth in their revenues as they hiked prices of their products due to rising cost of inputs.

Given this slack in consumer demand, the Finance Minister has made a significant course correction in her Budget proposals today, trying to put money in the hands of the middle class through the tax sops instead of trying to create demand through capital spending.

In her previous Budget speech, the Finance Minister had argued that significant investment her government made over the years in building and improving infrastructure had a strong multiplier effect on the economy, implying that this move had injected demand into the economy.

Earlier, she had contended that increased public investment would help crowd-in private investment, thus putting the economy on a sustained growth path.

However, government’s substantial capital expenditure did not quite encourage private sector investors, much like the way handy tax breaks that Sitharaman had provided in 2019 did not make them move. While subdued private sector investment has almost become a pattern, in the current fiscal year, government’s capital spending has also been inadequate.

Capex conundrum

According to the Controller General of Accounts, the government’s capital spending during April-November during FY25 was more than 12 per cent below the corresponding period in the previous fiscal year. The Finance Minister informed today that for the full year, capital spending could be more than 9 per cent less than the budgeted figure.

The Indian economy has struggled with demand deficiency for several years now, and the question is whether the tax sops offered to less than 5 per cent of the country’s population would be enough to inject sufficient demand, and to thus ensure a sustained level of growth in the ensuing years.

It may be argued that the even after the tax payers get the benefit, their purchasing power may not be unleashed on the market instantly as inflationary expectations have been a major worry for the consumers.

This has been substantiated by RBI’s consumer confidence survey, which reported that in November, 94 per cent of the consumers had negative expectations about price rise, and a year hence, this figure would not decrease by much.

Clearly, the government needed to be more forthright in its efforts to overcome demand deficiency, to create conditions for generating decent jobs.

The writer is former Professor of Jawaharlal Nehru University and Distinguished Professor, Council for Social Development

Published on February 1, 2025