Can Nirmala Sitharaman's tax cut spur growth? | Talking Sense with Srini

On February 1, India unveiled its Union Budget for 2025-26, with immense implications for the middle class and key sectors like energy and infrastructure. S Srinivasan, Editor-in-Chief of The Federal, shared his insights on the political and economic aspects of the budget in a detailed discussion on Talking Sense with Srini.

Tailored for middle class

Srinivasan noted that the budget brings major tax relief for the middle class. "Anybody earning up to Rs 12 lakh annually may not have to pay any tax," he said, explaining that the tax breaks will primarily benefit those under the new tax regime.

He also pointed out that the government’s tax relief includes a Rs 75,000 standard deduction for individuals earning Rs 12.75 lakh or more, further exempting them from tax. "This could result in about 20 per cent of my clients no longer needing to file returns," said Srinivasan, drawing attention to the widespread impact of the tax reform.

The relief is expected to resonate strongly with government employees in Delhi, particularly with the upcoming Delhi elections. "The middle class is going to welcome this, especially in Delhi, where government employees are a large demographic," he said.

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Political timing and strategy

Srinivasan pointed out the political timing of the budget, just days before the Delhi elections. "Nothing the government does is without keeping an eye on politics," he noted, referencing how the middle-class tax cuts could appeal to voters. "You also see a lot of mentions of Bihar in the budget — at least five to six times — so the coalition in Bihar is probably quite happy," he added, pointing to the political messaging embedded in the budget.

Capex and economic growth

The government’s focus on capital expenditure (capex) remains intact, despite a slight reduction in the capital expenditure share of GDP.

"While the spending has decreased as a percentage of GDP, the government has not reduced its overall capex," Srinivasan explained. He stressed that the government has maintained 22.13 per cent of total spending on capital expenditure, a signal that infrastructure development remains a priority. "The idea here is to push for more consumption, which is the key to stimulating the economy," he said.

Srinivasan also observed that the government's tax breaks aim to boost consumption by putting more money in the pockets of the middle class. "The government is hoping that this will lead to increased consumer spending, which will help revive the economy," he added.

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Shift towards MSME growth

The budget signals a renewed focus on micro, small, and medium enterprises (MSMEs), a sector crucial for job creation and economic growth. "The emphasis on MSMEs is significant," Srinivasan stated, pointing out that the government is attempting to address structural issues in the sector. While the private sector continues to be a central part of the government’s growth strategy, he noted that MSMEs might receive more targeted support going forward.

Nuclear energy and energy diversification

A noteworthy development in the budget is the government’s push for nuclear energy, with an outlay of Rs 20,000 crore. Srinivasan pointed out that this move is aimed at diversifying India’s energy mix.

"India is looking to balance its energy mix between fossil fuels and renewables," he explained, citing the government’s target of a 50-50 split between fossil fuels and renewables by 2030. "The emphasis on nuclear energy, particularly with private sector involvement, is a significant shift," he said, noting that this could become a new area of investment for large corporates.

Fiscal consolidation, growth projections

While the middle-class tax relief is a massive step, Srinivasan also points to the government’s continued focus on fiscal consolidation.

"The fiscal deficit target for 2025-26 is set at 4.4 per cent of GDP, which is a good number," he stated. However, he pointed out that growth projections for the next year are conservative, ranging between 6.3 per cent and 6.8 per cent.

"Managing inflation while achieving this growth will be a tough balancing act," he said, acknowledging that keeping inflation in check will be a critical challenge.

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Interest rates and RBI’s role

Srinivasan speculated that the Reserve Bank of India (RBI) may cut interest rates in response to the government’s efforts to maintain liquidity in the system.

"This budget signals enough liquidity in the system, which could lead to lower rates," he said, adding that the RBI’s decision, expected around February 7, will be crucial. "The onus will now be on the RBI to pass on the benefits of liquidity to the economy through rate cuts," he explained.

In conclusion, Srinivasan sees the Union Budget as a bold attempt to support the middle class, enhance infrastructure spending, and shift towards nuclear energy. "While the government has made significant strides in certain areas, it will need to carefully manage fiscal and inflationary pressures to ensure that the economy stays on track," he concluded.

(The content above has been generated using a fine-tuned AI model. To ensure accuracy, quality, and editorial integrity, we employ a Human-In-The-Loop (HITL) process. While AI assists in creating the initial draft, our experienced editorial team carefully reviews, edits, and refines the content before publication. At The Federal, we combine the efficiency of AI with the expertise of human editors to deliver reliable and insightful journalism)