Big Consumption Push With Fiscal Consolidation

The FM has created room for stimulating capital spending from next year

- B. Prasanna & Sameer Narang

The budget this year came against the backdrop of an economic slowdown led by weak urban consumption and lower government capex. Hence, finance minister Nirmala Sitharaman was expected to stimulate growth, while continuing on the path of fiscal consolidation. The budget has delivered this by incentivizing urban consumption through tax cuts, while continuing on the path of fiscal consolidation.

More important, by shifting the anchor of fiscal consolidation from fiscal deficit to debt-to-GDP ratio, the FM has created room for stimulating capital spending from next year. Hence, the budget has addressed both near-term and medium-term growth concerns while continuing on the path of reducing debt-to-GDP ratio over the long term.

The biggest announcement in the budget was for 80 million tax filers who, on an aggregate basis, will save ₹1 trillion in the budget (0.3% of GDP). Assuming a marginal propensity to consume of 0.77, it implies a 0.2% increase in growth in FY26 from FY25. In addition, it should lead to an increase in capacity utilization and thus drive investments in the long term. Given the reduction in income tax, next year's personal income tax collections are estimated to increase by 14.4%, slower than 20.3% in FY25.