Budget 2025 expectations: Fuelling India’s consumption engine

By Pratik Jain

The Indian Government is gearing up to unveil its Union Budget on 1 February 2025 and, as one would expect, the expectations from the same are running high.

Over the last few months, the growth in the country’s economy (5.4% in the September 2024 quarter) has been less than expected due to a visible slowdown in demand in most sectors. However, the structural long-term growth for India remains intact due to favourable demographics and stable governance. Whilst there are some positives like the encouraging sales of four-wheelers and two-wheelers, the current economic scenario warrants bold initiatives. The upcoming budget presents an ideal platform for the Government. This would mean expediting the Government’s expenditure (in the April to November 2024 period, the capital expenditure was 46% of the budgeted estimate of INR 11.1 lakh crore) and providing tax rate cuts and incentives in the budget.

Middle-income households eyeing tax relief

To arrest the dip in urban consumption, there is a popular expectation of a tweak in the income tax slab rates – especially for the upper-middle-class segment where the taxable income is more than INR 15 lakhs. To entice such individuals to re-engage in discretionary spending, the Government may reduce surcharge rates and/or tax rates of higher income slabs. Another related measure could be to provide a deduction of interest and principal payments of short-term credits taken for the purchase of certain non-essential/white goods. These provisions should equally apply to individuals opting for the new tax regime.

Additionally, even salaried individuals are anticipating a threshold increase of certain allowances/deductions such as the House Rent Allowance – considering the sky-high rental costs in metropolitan areas, increase in standard deduction and deduction under section 80C.

The Indian Government could follow the Australian government’s example here which implemented a similar tax cut in the past, resulting in increased consumer confidence and economic activities.

Boosting employment generation

The Government may consider reviving some discontinued tax incentives – such as the concessional corporate tax regime, originally introduced to bolster the manufacturing sector and create employment opportunities by offering a reduced corporate tax rate of, say, 15% to newly established manufacturing companies. This regime can also be extended to existing manufacturing companies which generate significant incremental employment.

Today, India is one of the most preferred destinations for setting up Global Capability Centres (GCCs). It may be worthwhile to consider tax breaks for GCCs in the form of a reduced corporate tax rate or profit-linked incentive, or even a presumptive taxation regime, thereby enticing more global businesses to establish or expand their operations in India.

The Government may also contemplate rationalising an existing tax provision which allows businesses to claim an additional 30% deduction on employee costs for newly hired workers earning less than INR 25,000 per month, in a bid to boost job creation. Revising the salary caps to make it more appealing for the domestic companies may also be a favourable idea.

Expectations from financial markets

A large portion of the country’s middle-income group has started investing in the stock markets. Perhaps, to get the earnings from the market circulated in the economy, the Government may consider providing tax exemptions on capital gains if sales proceeds are invested in infrastructure bonds, green bonds, electric vehicles etc. This situation will benefit both the Government and the taxpayers.

Additionally, the Government may contemplate generating liquidity in the economy by decreasing short-term capital gain tax rates for a brief period.

Rationalisation of Goods and Services Tax (GST) and other indirect taxes

The most effective way of an expeditious surge in consumption is to propose indirect tax rate cuts as they tend to have an overall wider impact.

While the decision for GST rate rationalisation would be taken by the GST Council (a group of ministers are already working on it), the budget may indicate such directional thinking of the Government.  The industry expects the four-tier rate structure (5%, 12%, 18% and 28%) to collapse into a three-tier structure soon, in order to simplify it and nudge the consumers towards buying more due to lower tax incidence.

Another facet can be decreasing the fuel tax rates as such a move would increase household disposable incomes whilst rapidly easing transport inflation.

Given the changing geopolitical equations and to further provide a thrust to the ‘Make in India’ initiative, major customs duty exemptions and concessions are likely to be reviewed. On products, as long as India is moving towards self-dependence, the duty rates would go up – and vice versa.  This may nudge India Inc. to look at enhanced value addition in India and tweak their supply chain models. To sum up, our economy is presently combating a complex web of challenges. Hopefully, by implementing some of the measures suggested above, the Government can provide a boost to consumption in order to elevate growth.

(The author is a partner with PwC India. Views expressed are the author’s own and not necessarily those of financialexpress.com.)