Union Budget 2025: Will Tax Relief Revive Growth Amid Economic Challenges?

As India grapples with a slowdown in urban consumption, inflation, and rising unemployment, all eyes are on Finance Minister Nirmala Sitharaman's much-awaited Union Budget for 2025-26. Set to present her record eighth budget on February 1, 2025, Sitharaman will have the delicate task of addressing multiple economic challenges and setting a course for sustainable growth.

The Economic Landscape Ahead of the Budget

India’s economy faces a turbulent backdrop as it prepares for the Union Budget. Slowing consumption, geopolitical uncertainties, and a lag in emerging technologies—particularly artificial intelligence (AI)—pose significant hurdles. On top of this, the looming threat of US President Donald Trump's tariff and trade policies adds another layer of complexity.

Despite these challenges, the Finance Minister's core team, led by Chief Economic Advisor V Anantha Nageswaran, is finalizing the budget with hopes of reviving growth and stimulating demand, particularly among the urban middle class.

Key Areas of Focus: Tax Relief and Economic Stimulus

Economists and analysts are widely anticipating that one of the key themes of the 2025 Union Budget will be tax relief for the urban middle class, a group that has been increasingly disillusioned by rising prices, stagnant wages, and job insecurity. The urban middle class drives much of India's consumption demand, making its financial health a crucial component of economic recovery.

Progressive Income Tax Reform

Many experts believe that the new budget will introduce a ‘progressive’ income tax regime to alleviate the burden on taxpayers. Madan Sabnavis, Chief Economist at Bank of Baroda, emphasized the need for income tax cuts across all income brackets, not just for lower earners. He pointed out that the ‘middle middle class,’ those earning between Rs 10-30 lakh per annum, has been hit particularly hard by inflation and stagnant wages.

“The pent-up demand in this segment could spur consumption if their disposable incomes increase,” Sabnavis said. If tax cuts are applied to this income bracket, it could help rejuvenate the consumption-driven sectors such as automotive, FMCG, and real estate, which have all been affected by the urban slowdown.

Aiming for Fiscal Consolidation

While tax cuts are expected, experts also foresee the government sticking to its path of fiscal consolidation. This means balancing the budget by controlling spending while continuing to support infrastructure projects and flagship government schemes. However, economists are hopeful that this year's budget will find the right balance between ensuring fiscal prudence and incentivizing economic activity.

Job Creation and Focus on Emerging Technologies

Job creation remains a key pillar of the government’s policy. In the previous budget, Finance Minister Sitharaman had earmarked Rs 2 lakh crore for job creation, including initiatives like employment-linked incentive schemes and the PM internship scheme. However, the implementation of these measures has been slower than expected, and there is anticipation that the new budget will include more focused interventions in the manufacturing sector and emerging technologies.

Rahul Bajoria, Head of India and ASEAN Economic Research at Bank of America, suggests that the government may expand Production-Linked Incentive (PLI) schemes in new sectors, particularly in emerging technologies like AI, where India is currently lagging behind global competitors such as China.

“There is a strong expectation that the next round of PLIs could focus on technology-driven sectors,” Bajoria said. This would likely include higher allocations for research and development, as well as initiatives aimed at building capacity in fields like AI and deeptech, areas where India needs to make significant strides to remain competitive.

The Path Ahead: What to Expect

While details remain under wraps, the 2025 Union Budget is expected to address both the short-term challenges of a slowing economy and the long-term need to modernize India's industrial and technological capabilities. Economists agree that a targeted tax relief for the middle class, coupled with strategic investments in infrastructure and emerging technologies, could set the stage for a recovery.

One thing is clear: India’s economic future hinges on the balance between easing the tax burden and boosting employment and technological growth. With geopolitical uncertainties and inflation squeezing household budgets, it will be crucial for the budget to offer both immediate relief and long-term solutions.

Conclusion

The Union Budget 2025-26 is shaping up to be a pivotal one for India's economic trajectory. With inflation, unemployment, and a deceleration in urban consumption posing challenges, the budget's focus on tax relief, job creation, and technology-driven growth will be critical. The government's ability to balance fiscal discipline with economic stimulus will determine whether India can regain its growth momentum in the coming years.

Reference from:-https://www.deccanherald.com/business/union-budget/union-budget-2025-tax-relief-likely-budget-looks-to-revive-growth-3381433