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Finance Minister Nirmala Sitharaman made history by presenting her eighth consecutive Budget. This will take Sitharaman closer to the record ten budgets presented by former prime minister Morarji Desai over different time periods.

But not for record breaking numbers, this year’s Budget was different in its core premises also, with decelerating macroeconomic fundamentals and a sharp fall in GDP growth. India’s gross domestic product growth has slumped to a seven-quarter low of 5.4% in July to September 2024 quarter – much lower than even the most pessimistic projections. GDP grew by 8.1% in the second quarter a year ago. That GDP growth was slowing down was evident when it grew by just 6.7% in the first quarter against 8.2% in the same quarter of last year. Gross value added (GVA) growth slowed to 5.8% during July-September 2024-25 quarter from 6.8% in the first quarter. GVA grew by 7.7% in the second quarter of last fiscal. The poor performance in the first two quarters has caused the finance ministry to downsize the projected GDP growth to 6.4% for 2024-25 against 8.2% achieved last year. The stake is enormous as a slowing economy would put doubt about India’s long advocated desire to become a $ 5 trillion economy by 2030. The Indian economy had left behind the damage caused by the coronavirus pandemic and was back to a high growth regime.       

Low consumption hurts growth

There are numerous reasons from poor global economic growth to the negative impact of the war between Russia and Ukraine and the conflict in Gaza. India's economy is going through a phase of subdued demand as growth in key sectors slows down. Multiple dynamics impact exports, consumption cycles, and income growth, pointing to a challenging outlook for 2025-26. One of the important reasons for this decelerating GDP growth was demand constraints in the domestic economy. This is evident in the falling share of consumption in GDP. The share of personal consumption in GDP declined by about 1.7 percentage points in just two years from 58% in 2022-23 to 56.3% in 2024-25 (provisional). To note, the share of private consumption in GDP was more than 58% in each of the previous three years.                       

Traditional economic theory suggests four factors; wealth effect, incomes, leverage, and fiscal transfers are considered as prime drivers of consumption cycles. Over the past two decades, these drivers have influenced consumption across distinct phases, including periods of broad-based growth and K-shaped recovery. In fact, a surge in domestic consumption expenditure was considered as a key factor for growth turnaround in the post-pandemic period.

All these four factors have shown signs of weakness in 2024-25. Household income growth has slowed down with rural wage growth remaining stagnant and organized sector wage growth decelerating. Consumption loans, which previously offset income sluggishness, have also slowed, dropping from 25% growth in 2023-24 to 15% in 2024-25.

Restructuring personal income tax rates

The question was: How to revive consumption sentiment in the economy? One way to do this was to increase disposable income of the middle class, the big contributor to consumption. FM has done exactly that in her Budget. She has reduced the tax burden of the middle class by restructuring personal income tax rates and slabs to increase the disposable income of individuals and in turn, boost consumption. In the Budget for 2025-26, Sitharaman has announced notable reforms to the personal income tax structure, aiming to improve the spending power of India’s middle class and stimulate economic growth.

India’s new tax regime, introduced in 2020 and revised in 2023, has been further updated in 2025 to simplify personal taxation. It offers lower tax rates while removing most deductions and exemptions.

Among key changes is the increase in the personal tax exemption threshold – under the new tax regime, individual income up to `12 lakh would now be tax-free as the applicable rebate, tax rates and tax slabs have been revised. This adjustment is designed to boost household consumption and savings. This is estimated to cost the exchequer about `1 lakh crore.

Over 86 million income tax returns (ITRs) were filed in the assessment year 2024 in India. It was estimated to increase to over 91 million in the year 2025. The number of income taxpayers has more than doubled since 2014.

In her post-Budget press conference, Sitharaman said that an additional one crore taxpayers will pay no tax post her announcement. This effectively means that 9 out of 10 salaried individual taxpayers will now pay zero income tax.

The question is: Will the increase in disposable income automatically be spent on consumption? Unlikely, for the benefit will go to the low middleclass salaried people, who would probably save the larger part of the income gains for future.

Agriculture, the first engine of growth

The good news from the consumer space, however, is that while urban demand is slowing, rural demand is holding up. Things seem to have changed with a solid Kharif harvest in 2024 and inflation moderated in the food basket, according to a report by SBI Securities last January.

In fact, many CEOs of consumer goods and FMCG companies admitted that the urban demand for everyday products had been distinctly slowing down while rural areas were showing surprising strength and growth in spending on these goods. The demand contraction is a lot more evident in the big spending cities like Delhi, Mumbai, Bengaluru and others. These have traditionally driven the sales of essentials and luxury products, the report said.

According to RBI the economic activity momentum is poised to be sustained and a strong rural demand is expected to receive a further fillip from the benefits given to the sector in Budget 2025-26

‘Agriculture is the First Engine for India’s Development:’ declares Sitharaman in her 2025-26 budget speech. No wonder, the growth of the sector that provides livelihood to about 65% people of India would be treated with priority.

The Budget focuses on agricultural growth, with initiatives like a Makhana Board, National Mission for High Yielding Seeds, Cotton Productivity Mission, enhanced Kisan Credit Cards, urea plant expansion, and sustainable fisheries development to benefit farmers and boost production.

This is a different question that the budget words are not reflected in the allocation to the sector, the first indication of importance. But then the sector has been receiving promises of doubling farmers’ income to provide easy credits, over the years.

In 2025-26, Rs.1,37,757 crore has been allocated to agriculture (2.7% of the union budget). The allocation towards the ministry is estimated to decrease by 2.5% over the revised estimates of 2024-25. According to the revised estimates of 2024-25, the expenditure of the ministry has increased by 6.8% over the budget estimate.       

Power supply at lower cost,  employment generation and better credit facilities needed for higher growth. Modi government has reaffirmed the importance of providing with appropriate facilities to the 'first engine of growth' to achieve higher economic growth.

FM keeps her faith on infrastructure building

Sitharaman may have taken bold measures to boost flagging consumption by cutting middle class tax burden but she has kept her faith on infrastructure building to drive growth and create jobs. It serves to improve the effectiveness and efficiency of the entire supply chain network by lowering transportation costs and simplifying operations.  Investment made over the years in building and improving infrastructure has had a strong multiplier effect on the economy. “We will endeavour to maintain strong fiscal support for infrastructure over the next 5 years, in conjunction with imperatives of other priorities and fiscal consolidation”, FM has claimed in her previous budget. She has provided Rs.11.21 lakh crore for capital expenditure in this year’s budget. This is about 3.4% of GDP, a little more than that of last year’s figure of 3.1%.           

That the Modi government considers infrastructure building as the growth engine of the economy is evident from the sharp rise in capital expenditure over the years. In five years, between 2020-21 and 2025-26 Budget 2024-25, the government’s capital expenditure has gone up by more than two and half times from Rs.4.26 lakh crore in 2020-21 to Rs 11.21 lakh crore in this year’s budget.

Sitharaman has announced a host of measures aimed at driving infrastructure development and innovation. And while FM has reiterated the role of the private sector in infrastructure building, she has urged for states’ active participation in infrastructure development. She has announced that ` 1.5 lakh crore will be provided in the form of 50-year interest-free loans to states for infrastructure projects.

The finance minister further announced the launch of a new asset modernisation plan for the 2025-30 period, aimed at generating `10 lakh crore to fund new infrastructure projects. Building on the success of the first plan introduced in 2021, this initiative will help reinvest capital to drive the country's infrastructure growth.

To begin with, the real estate sector stands to benefit from the increased capital expenditure on infrastructure, particularly through initiatives such as the ` 1 lakh crore Urban Challenge Fund and Rs.1.5 lakh crore interest-free loans to states. These measures are expected to accelerate urban transformation, boost connectivity, and generate employment, thereby indirectly fueling real estate demand.

Fiscal deficit comes down

Despite a bigger budgetary expenditure (7.3% more than that of the revised estimates of 2024-25 Budget) and nearly one lakh crore revenue loss due to restructuring of income tax rates Sitharaman has succeeded in keeping fiscal consolidation exercise on track. Surely, some expenditure compression also helped.

Apparently, the fiscal deficit figure is the only operational target for fiscal consolidation. In the revised estimate for 2024-25, the government has fixed its fiscal deficit target to 4.8% of GDP, marginally lower than the budget estimate of 4.9%.  And now, FM has projected a fiscal deficit at 4.4% of GDP in 2025-26.

The budget statement on fiscal policy says since FY 2021-22, adoption of an operationally flexible fiscal consolidation path has served the country well. "India is now set to attain the goal outlined in the Budget for FY 2021-22 and reach fiscal deficit level below 4.5% of GDP in FY 2025-26," according to the document.            

The report also said that barring any major macro-economic disruptive exogenous shocks, and while keeping in mind potential growth trends and emergent development needs, the Centre will try to keep fiscal deficit each year (from FY 2026-27 to FY 2030-31) such that govt's debt is on a declining path to attain a debt-to-GDP level of about 50% (plus/minus 1%) by March 31, 2031, which is the last year of the 16th Finance Commission cycle.

The Budget outlines its intent of reducing the central govt debt to GDP ratio to 50 plus-minuses one per cent by 2030-31 from 56.1% projected for 2025-26. According to analysts this would align with a fiscal deficit of close to 3-3.3% of GDP, and provides space for a capex target of close to 3-3.5% of GDP by 2030-31.

Startup ecosystem gets a boost

India has the third-largest startup ecosystem in the world, with over 1.57 lakh certificates issued by Department for Promotion of Industry and Internal Trade (DPIIT) for recognition of startups as of December 31, 2024.

This journey to becoming the world’s third-largest startup ecosystem was no accident but the result of years of persistent effort, government support and the dynamic interplay between entrepreneurs, investors, and policymakers.

FM in her last budget has once again reaffirmed the government's commitment to promoting innovation and entrepreneurship, rolling out a set of policies that aim to strengthen the startup ecosystem further. While the broader economic agenda focuses on fiscal prudence and growth, the budget’s startup-specific provisions indicate a clear intent to sustain momentum in India’s entrepreneurial landscape.

The government has played an active and decisive role over the years in modernising the startup ecosystem by introducing supportive tax policies, financial assistance, and regulatory relief. The removal of the ‘Angel Tax’ in 2024-25 Budget was a landmark decision that encouraged greater foreign investment into Indian startups.

The announcement of an expanded Fund of Funds (FoF) with an additional Rs.10,000 crore allocation is another positive step, in the right direction. The earlier FoF initiative committed over ` 91,000 crore, playing a crucial role in catalysing private investments. This fresh infusion will provide more financial muscle to startups, particularly in high-risk, high-growth sectors.

This year’s budget has also taken care of the credit needs of start-ups. FM has enhanced the Credit Guarantee Scheme for Startups, increasing the limit from Rs.10 crore to Rs.20 crore, and moderating the guarantee fee for loans in 27 strategic sectors. 

India has the third-largest startup ecosystem but it has the potential to surpass global benchmarks. The budget provisions this time have provided a strong foundation for growth, but the actual outcome will depend on the timely and effective execution of these policies.If the government supports the sector with timely policy reforms withindustry collaboration, India may well be the largest startup ecosystem in the world.