Relief The Union Budget 2025-26 delivers a substantial tax break to India’s middle class, with the exemption threshold rising to Rs 12 lakh from Rs 7 lakh. This move, aimed at boosting consumption, comes at a time when urban demand remains weak and food inflation has squeezed household budgets. While it is a politically astute decision, the question remains: Can the economy sustain this fiscal generosity without derailing its broader financial discipline? The government has sought to strike a balance ~ reducing the tax burden while keeping the fiscal deficit in check. The fiscal deficit target for 2025-26 has been set at 4.4 per cent of GDP, down from 4.8 per cent this year.

This is a notable step toward fiscal consolidation, but it is also a tight-rope walk. The estimated revenue loss from tax cuts stands at Rs 1 lakh crore, and while the government has increased capital expenditure to Rs 11.21 lakh crore, the room for further spending is limited. The rationale behind the tax cuts is clear: putting more money in people’s hands to stimulate spending. However, middleclass households have shown a tendency to prioritise savings over discretionary expenses, particularly in times of economic uncertainty. High food inflation, which stood at 8.39 per cent in December, remains a major concern, eroding purchasing power. If the extra income is channeled into savings rather than immediate spending, the expected boost to consumption may fall short.

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Another challenge is that tax relief benefits a specific segment of earners. While salaried professionals and small business owners will have more disposable income, those outside the formal tax net ~ particularly daily wage workers and the lower-income group ~ are unlikely to see direct benefits. To truly revive demand, there must be a parallel push toward job creation and income growth at all levels. Beyond tax cuts, the budget outlines plans to boost key sectors. The increase in capital expenditure, particularly in infrastructure and manufacturing, is expected to drive economic momentum.

However, India has long struggled to raise manufacturing’s share of GDP beyond 17 per cent, despite multiple policy interventions. Announcing new missions to push production and exports is important, but execution remains the real test. In the farm sector, a national mission focusing on high-yield crops, particularly pulses and cotton, aims to address productivity concerns. Additionally, raising the subsidised credit limit for farmers to Rs 5 lakh from Rs 3 lakh should provide financial support. However, without deeper reforms in agricultural marketing and procurement, these measures may offer only limited relief. One of the most significant policy shifts is the decision to allow 100 per cent foreign direct investment in insurance, up from 74 per cent. This is a welcome step toward deepening the financial sector, but regulatory clarity will be key to attracting global players. Ultimately, this budget reflects a trade-off: immediate relief versus long-term stability. If tax cuts successfully revive demand and private investment picks up, the government’s fiscal targets may hold.