What the budget does for demand

The budget seems to have taken the economically rather than the politically prudent route to achieve its demand objective. There is no big-bang announcement about some new welfare scheme. Allocation for flagship income support programmes such as the rural employment guarantee scheme and PM-KISAN are unchanged. The fiscal deficit is expected to come down from 4.8% in 2024-25 Revised Estimates to 4.4% in 2025-26. This means that the overall fiscal impulse of the budget will be contractionary compared to last year.

But it has given a boost to the purchasing power of the middle classes by bringing down income taxes. In fact, the word “demand” only makes an appearance in the budget speech (outside annexures) when the income tax proposals are discussed. The direct tax changes alone, according to the budget speech, should generate an additional ₹1 lakh crore in disposable incomes (incomes less taxes) in the next fiscal year. Its actual impact on consumption spending, depending on factors such as people shifting to what is clearly a consumption-nudging New Tax Regime from the saving-rewarding Old Tax Regime could be even greater.

When seen from a medium term perspective, the demand tail winds from tax savings, and therefore increased disposable incomes, will continue beyond this year’s budget. The new Pay Commission awards, which are expected to be implemented in 2027, should add to these tail winds. This is bound to give a boost to consumer demand from the middle classes beyond this year. It could potentially provide a much-needed catalyst for subdued animal spirits which have been holding back private capital investment on account of weak demand in the economy.

What the budget could not do in the macro framework given its need to bring down the fiscal deficit, it perhaps seeks to achieve from its micro focus on various schemes. True to this government’s style, there are many such announcements in this budget as well.

For rural demand, there is a plan to boost agricultural productivity and therefore incomes in 100 backward districts. Then there is talk about unlimited procurement of pulses for farmers who enter into a prior agreement with procurement agencies. Similarly, there is talk about focusing on value chain infrastructure in horticultural products which now exceed the value of food grains in India’s agricultural products. Farmers’ producers’ organisations, cooperatives etc. are expected to play a key role in achieving these objectives. This is more a governance and execution challenge than just the question of throwing money.

For the urban poor, there are promises of giving easier access to credit. The government has also announced that a big section of the urban poor, the gig workers, will be able to avail existing government schemes on health benefits. Similarly, about ₹30,000 crore have been allocated under the internship programme and a new employment generation scheme. The hope is that this will give a boost to both employment and employability.

How much of a difference will these announcements make?

The budget has no delusions here. The Economic Survey presented on Friday has been pretty conservative in its growth forecast. It has forecast a range of 6.3%-6.8% for GDP growth, compared to the expected 6.4% number for 2024-25. The Indian economy expanded by 8.2% in 2023-24. The survey clearly says that India needs sustained growth of at least 8% over a decade to boost income levels and become a developed economy, making it clear that current growth performance is far from adequate. Even the nominal GDP growth rate assumed in Budget 2025-26 is 10.1%, lower than the 10.5% number in the July 2024 budget.

Perhaps, the assumed growth numbers would have been even lower without the income tax boost to demand in this budget. Here the government has done the right thing in doing a calibrated rather than sudden withdrawal of the fiscal stimulus — not reducing tax rates would have allowed for a much higher reduction in fiscal deficit.

To be sure, the budget is not the only factor which affects demand. There has been a widespread consensus among analysts that the baton for pushing up demand would have to move from fiscal policy to monetary policy given the fiscal glide path and stabilising inflation.

Will the Reserve Bank of India do its bit and bring down interest rates in its Monetary Policy Committee (MPC) meeting next week? How much of a difference will this make to consumer demand? After all, lower rates could mean lower mortgage costs. Economic prospects for the next year will depend on what monetary policy does to boost demand over and above what the budget has done.