Will the tax relief announced by Finance Minister Nirmala Sitharaman in the Union Budget 2025 boost the Indian economy?

Will the disposable money in the pockets of the salaried people encourage them to spend more so that the economy will get pushed?

Will it leave the government with less income tax revenue collection and at the same time the rise in consumption will not be enough to compensate for the decreased tax collection?

Was it a gamble played by the finance minister, who may find it difficult to manage finances and limit the fiscal deficit?

Will Tax Relief Boost Economy?

Nirmala Sitharaman has been praised abundantly for giving tax relief to the middle class beyond all expectations at a time when the GDP growth rate came down and she declared to limit the fiscal deficit to 4.5% of the GDP.

Christian de Guzman, Senior Vice President and Lead Sovereign Analyst of Moody’s Ratings in India has expressed doubts and said that it is not yet clear if the the finance minister has done enough to boost economic growth by undertaking tax measures.

She told the Economic Times, “I think it depends on whether consumers do spend that money that is freed up from these tax measures… I would place some uncertainty there.”

Going beyond all expectations, Nirmala Sitharaman declared that no tax would be payable to the annual income up to Rs 12 lakh. If the standard deduction is added to this, it will come to Rs 12,75,000. In means, that the taxpayer with an annual income of Rs 12,75,000 will not have to pay any tax.

Why Not Capital Expenditure For Long-Term Benefits?

Analysts also believe that the benefits of tax cuts are short-term while capital expenditure, particularly investment in infrastructure projects, have long-term benefits. Should she have invested more in these projects?

Will Union Budget 2025 change Moody’s idea of the Indian economy and increase its rating? Guzman said, “That slower pace of fiscal consolidation is not going to be material enough to change our view on (India’s) rating at the moment.”

Moody’s affirmed the lowest rating of “Baa3” with a stable outlook for India in August 2023.

A higher rating is much needed for India at this juncture as it would promote foreign investment, lower borrowing costs and add more credibility to its business activities.

Can Nirmala Sitharaman Generate More Revenue?

Analysts believe it is ironic indeed that the government will have to generate more revenue with reduced income tax collection to consolidate fiscal deficit.

In an attempt to bring fiscal discipline and consolidation, the government has to cut the debt-GDP ratio by half by 2031. It aimed to cut down the fiscal deficit from 4.9% for FY 2024-25 to 4.5% for 2025-26.

Nirmala Sitharaman has taken the decision to make the annual income up to Rs 12,75,000 tax-free at a time when direct tax revenue has surpassed the indirect tax revenue.

How Many People Will Now Pay Income Tax?

Though the number of people filing income tax returns is increasing every year, it is still about 6.68% of the total population. About 2.2% of the adult population of India pays income tax, much less than 78.3% in France, 50.1% in the US, 61.3% in Germany and 59.7% in the UK.

After the latest rise in the income for tax liability, less than 1% of adults will pay income tax.

Analysts believe, that as the corporate tax has been left untouched at 25%, and the income tax collection is certain to fall, the burden will fall on the GST. The government may increase tax rates and introduce new tax slabs in the name of GST rationalisation.

Will an increase in the GST rates help increase consumption? Will it not defeat the purpose of this massive exercise and populist step?