The India Budget 2025’s announcement of no income tax on earnings up to ₹12 lakh and relaxations in the TDS has emerged as a key highlight. Framed as a step to boost consumption, the measure aims to put more disposable income in the hands of individuals, theoretically stimulating spending. While an extra ₹60,000 to ₹1,00,000 in the pockets of a small fraction of the population sounds promising on paper, the broader macroeconomic indicators suggest that the issue runs deeper than a simple tax cut can resolve.

Declining Private Consumption and Savings

The steady decline in private final consumption expenditure (PFCE) and household savings presents a worrying trend for the economy. The National Accounts Statistics show that real PFCE, which accounted for 58% of GDP in 2021-22 and 2022-23, has now fallen to 55.8% in 2023-24, with its growth rate plummeting from 11.6% in 2021-22 to just 4% in 2023-24. This slowdown is mirrored in real per capita private consumption, which grew by only 3.12% in 2023-24 compared to 5.6% two years prior. Simultaneously, household savings in real terms have eroded from 22% of GDP in 2020-21 to 18.4% in 2022- 23. With both consumption and savings on a downward trajectory, the economy risks entering a prolonged demand slump, where businesses hesitate to invest, employment generation weakens, and economic activity stagnates.

Rising Inventories and Slowing Government Spending

The National Accounts data also show a rise in stock accumulation from ₹16 crore in 2021-22 to ₹19 crore in 2023-24 signals potential economic distress, with multiple possible explanations. Weak consumer demand suggests that businesses may be producing more than consumers are willing to buy. Additionally, firms may have overestimated post- pandemic recovery and scaled up production, only to face weaker-than-expected sales. Compounding this issue is the slowdown in government spending. Government final consumption expenditure (GFCE) in real terms has also seen a significant decline, dropping from 9% in 2022-23 to just 2.45% in 2023-24. Theoretically, during economic downturns, the governments play a stabilizing role by increasing public expenditure to boost demand. However, the current decline in GFCE coincides with a broader weakening of private consumption.

The Shifting Tax Burden

The shifting tax burden in India reflects a growing reliance on individual taxpayers while corporate contributions decline. The income tax return statistics show that direct taxes now make up 56.7% of total tax revenue, up from 52% in 2021-22, with personal income tax rising from 49% to 55.3% over the same period. Meanwhile, corporate tax contributions have dropped from 50.4% to 46.5% following a reduction in corporate tax rates from 30% to 25% as declared in the former Union Budget. The rationale behind this cut was to spur investment and job creation.

However, the Economic Survey 2023-24 shows that corporate profits have hit a 15-year high, yet employment has only grown by a meager 1.5%, and real wages remain stagnant. Meanwhile, self-employed and casual workers have seen their real wages decline. If businesses are thriving but people’s incomes are not rising, it is clear that the benefits of corporate tax cuts are not trickling down as intended.

Who Really Benefits from Tax Exemptions?

With less than 2% of the population classified as middle class and 96% of the labor force employed in the unorganized sector, Budget 2025’s tax exemptions appear to cater to a narrow demographic while bypassing the broader workforce. The additional ₹60,000 to ₹1,00,000 in disposable income for approximately 2 crore individuals may offer limited financial relief, but its impact on reviving aggregate demand remains questionable. Meanwhile, the government is set to forgo nearly ₹1 lakh crore in direct tax revenue due to revised personal income tax slabs, yet it has opted to reduce its fiscal deficit rather than expand welfare spending. This approach has resulted in either stagnant or declining allocations to major welfare schemes, limiting public investment in job-creating sectors.

A Demand-Side Problem with a Supply-Side Solution?

Instead of addressing weak demand, the budget continues to prioritize supply-side interventions, favouring capital-intensive infrastructure and corporate tax benefits. Without wage growth and job creation in the organised and unorganized sector, its long-term impact remains uncertain. While the Budget eases the burden for a small segment of tax- payers, it fails to tackle core economic challenges—low demand, stagnant wages, declining savings, high unemployment, and sluggish growth.