Budget 2025 tax cuts ‘will boost demand and consumption’

The Union Budget 2026 will boost growth over the next few years by increasing domestic demand through tax cuts for households, according to leading credit rating agencies.

India’s Finance Minister, Nirmala Sitharaman, presented the Union Budget for 2025-26 on February 1 in Parliament.

The Budget introduced significant reforms, including the removal of income tax liability for individuals earning up to R 1.2 million annually (£11,000), excluding special income. Additionally, the budget outlines reforms aimed at supporting start-ups and MSMEs, alongside a focus on key sectors for manufacturing growth.

S&P Global Ratings said it expects India will hit its deficit targets despite revenue loss from lifting the threshold for minimum taxable income and slower economic growth.

And, in its report on the Budget, Moody’s Ratings said the foregone revenue due to tax cuts would slow the pace of the country’s fiscal consolidation, even as total spending declines as a share of gross domestic product (GDP). It noted that tax measures will bolster middle-class spending power and consumption.

Meanwhile, Fitch Ratings said the Budget would be broadly neutral for growth and continued to project real GDP expansion of 6.4% in FY25 and 6.5% in FY26. Tax cuts, Fitch Ratings said, may provide a modest consumption boost.

S&P said the slower growth in capital investments for FY26 does not suggest a deterioration in the quality of government spending. “India’s Union Budget remains in line with our expectation of gradual fiscal consolidation… We believe bottlenecks in executing infrastructure projects will ease as supply chain pressures lessen and general elections are over,” S&P said in a press statement.

The agency said the Budget allocation for capital expenditure is 3.1% of GDP, unchanged from last financial year, an increase of 10% year-on-year in absolute terms.

S&P has projected that, combined with central government deficits that may trend down to 4.2% of GDP by FY28, the general government fiscal deficit could gradually decrease to 6.8% of GDP from 7.8% in FY25.

Highlighting that the Budget promotes private and state investments in infrastructure and energy transition, Moody’s Ratings said the boost to spending due to rising disposable income would benefit makers of two-wheelers, passenger vehicles and white goods, and ride-hailing service providers.

“The latest Budget signals a slowing pace of fiscal consolidation, as the government seeks to provide firmer support for economic growth amid a dampened macroeconomic backdrop compared with recent years. Still, we expect the government is within reach of its near-term deficit target of 4.5% by FY26,” Moody’s Ratings said.

Focus on smaller businesses

When presenting the Budget, Finance Minister Sitharaman said MSMEs contribute nearly 45% to India’s exports, making them a vital component of economic growth.

She also unveiled a new scheme targeting 500,000 first-time entrepreneurs from Scheduled Castes, Scheduled Tribes, and women that will provide term loans of up to R 20 million over the next five years. Additionally, the National Manufacturing Mission will drive the ‘Make in India’ initiative by integrating small, medium, and large industries into the global value chain, with a special focus on making India a global hub for toy manufacturing. The mission also has a mandate to focus on clean tech manufacturing for climate-friendly development and facilitating a future-ready workforce for in-demand jobs.

Investment was also a central theme in the Budget, categorized into three key areas—people, economy, and innovation. Regarding investment in people, the finance minister announced:

• Broadband connectivity for all government secondary schools and primary health centres in rural areas.
• Five National Centres of Excellence for Skilling with global expertise to equip young people careers in ther manufacturing and technology sectors.
• The setting up of a R 5 billion Centre of Excellence in Artificial Intelligence for educational purposes.
• A structured initiative to provide gig workers with identity cards and healthcare coverage.

On investment in the economy she announced:

• R 1.5 trillion interest-free loans to states for capital expenditure.
• The second Asset Monetization Plan (2025-30), to reinvest R 10 trillion into new projects.
• An Urban Challenge Fund of R 1 trillion for urban redevelopment and water sanitation projects.

For investment in innovation it was announced that:

• R 200 billion will allocated to private sector-driven R&D initiatives.
• A National Geospatial Mission will support urban planning.
• The Gyan Bharatam Mission will survey, document and conserve over 10 million manuscripts, alongside a National Digital Repository of Indian knowledge systems.