Budget 2025-26 centres around the ‘middle class.’ This time, in the run-up to the Budget, an unprecedentedly large number of commentators had urged the Finance Minister to focus on this hitherto neglected section of the society.

The 71 per cent hike in the ‘zero tax’ slab limit for personal income tax combined with the doubling of tax deduction on interest income for senior citizens to ₹1 lakh will augment the disposable income of the middle class. The additional income is likely to be used for consumption, savings and availing of loans, especially retail loans.

Consumption demand will boost almost all product segments leading ultimately to capacity expansion and investment by industries. Off-take of retail loans which had moderated following the RBI’s macro-prudential measures will increase.

At another level, increase in demand will push up indirect tax collections.

A major part of the additional disposable income will go to banks as deposits, especially from the senior citizens and risk-averse citizens. This is, however, subject to banks not reducing their current deposit rates, which, it is apprehended, may happen, with the RBI reducing the policy repo rate.

Bank deposits are traditionally effort-elastic. Therefore, banks will have to scale up their efforts to canvass deposits through personal contacts, particularly from very senior citizens, women and computer- and financially-illiterate persons.

Besides, in the rural and semi-urban areas, they have to expand their touch points.

Instead of obsessing with current and savings account deposits, banks should increasingly mobilise term deposits, which are comparatively more stable. Increased bank deposits will calm the intermittent liquidity woes too.

Another part of the savings will go to the capital market, mostly via mutual funds, which will favour the stock market and partly mitigate funds migration by the foreign institutional investors.

The hike in the threshold to collect tax at source on remittances under the RBI’s Liberalized Remittance Scheme from ₹7 lakh to ₹10 lakh (by 43 per cent) was overdue following the rupee depreciation and escalated costs of education and living abroad. This will particularly help international students from the middle class.

Agriculture and MSMEs

The middle class in the agriculture and allied activities (“the first engine of growth”) will benefit from several policy and financial support announced in the Budget. Aquaculture and fisheries constitute a case in point. Also, the limit under the Modified Interest Subvention Scheme is increased by ₹2 lakh for loans taken through Kisan Credit Cards.

Similarly, the Micro, Small and Medium Enterprises (MSMEs) (“the second engine of growth”) has received many benefits: enhancement of investment and turnover limits for their classification to 2.5 times and 2 times, respectively; enhancement of the credit guarantee cover; and customised credit cards for micro enterprises.

The FM has highlighted the role of the banking sector in the envisioned development process. All banks have to accelerate their traditional ‘financial intermediation’ function due to larger savings generation and more credit demand, including priority sector lending.

The India Post Bank, in particular, has been assigned a very special role as a “catalyst for the rural economy.” Here, a thought for consideration is: can the payments banks, in future, transform themselves into universal banks, as observed in respect of small finance banks.

The foreign direct investment limit for the insurance sector is raised to 100 per cent from 74 per cent for those insurers which invest the entire premium in India. This is good news, particularly for those insurers which already have foreign partnership. Moreover, since normally insurance companies invest in long-dated securities, this will alleviate the sporadic liquidity crunch.

As disposable income of the middle class increases, insurance density (per capita premium) will increase; so will insurance penetration (premium/gross domestic product). However, the much-expected reduction or elimination of Goods and Service Tax (GST) on health insurance policies has not materialised. Limiting the annual increase in premium for senior citizen health insurance policies to 10 per cent, which was announced by the Insurance Regulatory and Development Authority of India on January 30, suggested such a possibility.

Boost for tourism

The impetus given to the tourism industry in the Budget will not only augment income but also generate employment. This will, in turn, give a fillip to personal loans and card business of banks and their card subsidiaries. However, there’s a risk if the over-enthusiastic tourists take recourse to ‘Buy Now, Pay Later’ schemes and are unable to repay on time.

Demand unless matched by supply may stoke inflation which may be exacerbated by the volatile geopolitical conditions and a depreciating rupee. Thus, a lot of responsibility devolves upon the RBI to manage inflation.

The setting up of a High-Level Committee for Regulatory Reforms to review all non-financial sector regulations is welcome.

This Budget has increased the disposable income of the vast middle class. It’s hoped that the next Budget will focus on employment.

Das is a former senior economist, SBI. Views are personal

Published on February 10, 2025