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Middle-class voter takes pride of place

Tax relief announced in the Budget goes beyond the need to spur consumption demand
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Bonanza: The revised rates in various tax slabs give substantial benefits to salaried taxpayers. Reuters
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There is a reason why the annual Union Budget grabs attention, even if disproportionate. Embedded in the Finance Minister’s speech and the numbers -- the sanctity of which has been questioned in recent years — are signals on how the government proposes to stabilise the economy and make it grow, and how income and wealth will be redistributed.

There are multiple signals sent out through the 2025-26 Budget that reflect the intent of the BJP-led NDA government at the Centre. The strongest signal was reserved for the last paragraph of the FM’s speech, when she doled out unexpectedly large sops for the middle-class, salaried taxpayers. The ceiling on tax-free annual income has been raised from Rs 7 lakh to Rs 12.75 lakh (with standard deduction of Rs 75,000). The revised rates in various tax slabs give substantial benefits to those who pay income tax. According to the minister, potential direct tax revenue to the tune of around Rs 1 lakh crore has been foregone to deliver this benefit. These sops have been justified on the ground of spurring consumption demand that has been slack in recent times, contributing to a deceleration in the GDP growth that has troubled the government.

The second signal is a desire to declare that the government is intent on sticking to its efforts at fiscal consolidation by keeping the deficit on a downward “glide path”, so as to limit and stabilise the public debt-to-GDP ratio. This is clearly meant to appease foreign investors, who have in recent years rushed into India, and hugely increase the presence of foreign financial investments in the country. Being footloose, this capital can exit at a short notice. Financial investors loathe government deficits, not least because of the fear that they would stoke inflation and erode the real value of financial assets. Fiscal conservatism must be the price to pay to retain the confidence of these investors.

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If taxes on the rich as well as corporates recording high profits are not being raised and direct tax sops are being provided to the middle class, fiscal consolidation can be ensured only by reducing expenditure. This seems to be corroborated by the fact that total expenditure is slated to fall from 14.6 per cent of the GDP in 2024-25 to 14.2 per cent during 2025-26. But a third signal that the Budget sends out is in conflict with the fiscal contraction narrative. That’s the government’s ostensible intent of raising capital expenditure to support private investment. A lot of that investment is expected to be realised with marginal outlays aimed at incentivising private investments through public private partnerships, but the expenditure figures do point to a 17 per cent hike in capital spending relative to the revised estimates for 2024-25.

Optimistic expectations of tax buoyancy and inflated numbers on receipts from non-tax revenue and privatisation partly explain this capacity to raise capital expenditure. But, an important part of the explanation is a willingness to rein in welfare expenditure, including on erstwhile flagship programmes that the NDA government inherited and then claimed credit for. The outlay for the National Rural Employment Guarantee Scheme, having fallen from Rs 90,800 crore in 2022-23 to Rs 86,000 crore in 2024-25, is expected to stay at the same level, even though wage payments are in arrears and demand for jobs is high. Similarly, the food subsidy bill for an enhanced safety net under the National Food Security Act, having fallen from Rs 27.3 lakh crore in 2022-23 to Rs 19.7 lakh crore in 2024-25, is projected at just Rs 20.3 lakh crore in 2025-26.

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Measures announced in the Budget are sometimes a response to the government’s assessment of the prevailing economic situation. But more often and increasingly so in the ‘new India’, budgets are instruments in the hands of the ruling party to build vote banks and sway voters. Central budgets are crucial here because of accelerated centralisation of resources in the hands of the Union Government, often at the expense of states (through, for example, the reliance on cesses and surcharges not included in the divisible pool of taxes to be shared with the states as per the constitutional mandate). As a result, the ruling party at the Centre has greater leeway in deploying resources through its own tax and subsidy schemes, and through its choice of Centrally sponsored and Central sector schemes to emphasise upon.

Thus, statements from within the ruling coalition and outside have attributed the FM’s direct tax largesse to the need to consolidate a middle-class vote bank, especially with an eye on upcoming state elections, including the one in middle class-dominated Delhi. Special allocation for projects like the Western Kosi Canal extension and renovation, the creation of a Makhana Board to support production of the crop and other forms of assistance for Bihar are clearly driven by the need to appease a key ally, the JD(U), and woo voters in the state that will go to the polls later this year. Meanwhile, governments in Opposition-ruled states — Karnataka, Kerala, Tamil Nadu and West Bengal — have complained that their legitimate demand for funds has been ignored.

Riding on the analysis in the Economic Survey, which flags the fact that depressed consumption demand and inadequate government capital spending underlie the deceleration in economic growth, the FM claims that tax cuts to boost middle-class demand and increased capital expenditure would help reverse the slowdown. This argument makes the hold on welfare spending a sacrifice needed to revive growth. But an alternative explanation could be that the government expects greater immediate political mileage from consolidating its middle-class vote bank than from providing more support for the weakest sections. The latter, the ruling party possibly believes, have already been won over with the limited support on offer, and by the concerted efforts to attribute to the Centre and the PM the benefits provided under Centrally sponsored schemes that are partly financed by states.

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