NEW DELHI: To arrest the slowdown being witnessed in urban demand, the Centre should announce a slew of targeted-measures in the upcoming Union Budget for FY26, economists said.
Many of them suggest that income tax rates, in the new tax regime, should be eased to give more disposable income to individuals; while some said the fiscal consolidation path should be adhered to for restraining inflation, to subsequently spur consumption.
ICICI Securities Primary Dealership’s Senior Economist Abhishek Upadhyay suggests that the government can increase standard deduction for salaried taxpayers under the new tax regime (NTR) from the present levels (Rs 75,000 per annum).
He further says that the 30% slab should kick in after an income of Rs 30 lakh per annum (and not Rs 15 lakh) in the NTR; and a cut in excise duties on fuels can also be considered.
Paras Jasrai, economist, India Ratings and Research (Ind-Ra) said: “Controlling inflation would give a boost to consumption demand, as this increases real wages. By focusing on fiscal consolidation, the government can help reduce inflation and thus boost consumption.”
FE reported on Monday that the Budget may target a fiscal deficit of below 4.5% of GDP for the next financial year. In FY25, the fiscal deficit is likely to come in at 4.8%, even though the Budget aim is 4.9%.
India’s retail inflation is seen averaging at 4.8% in FY25, and in the next fiscal at 4.5%, according to economists.
The urban real wage growth in the past 12 months have been severely low, which has dampened consumption growth. According to Ind-Ra, the minimum wage for unskilled workers in urban areas has grown merely 0.9%, in real terms, in 2024. In fact in the October-December quarter of 2024, the wage growth was negative at (-)0.8%.
In the corporate sector, too, wage growth has not been high, which has played a part in slowing urban consumption growth, say analysts. Last month, chief economic adviser V Anantha Nageswaran had said that despite impressive growth in profitability of corporates, the compensation to employees have remained “weak”, and not kept up with rising inflation. “A better balance is needed by corporates in the share of profits going to workers and capital spending,” he had said.
Further, economists said that the government should focus on improving household income growth, through measures in the Budget, to support consumption. Apart from simplifying and lowering indirect taxes, any support to the construction sector (the second-highest employer industry in India) would be highly effective, said Motilal Oswal Financial Services (MOFSL) in a report.
Also, while the formalization of the economy is useful, complete ignorance of the huge informal sector (say, MSMEs) is not recommended. Therefore, any noninflationary support to the micro and small enterprises would be welcome, they added.
According to official sources, the credit guarantee scheme for MSMEs, announced in July, will take form in the upcoming Budget, with a focus on facilitating capital investments by the manufacturing sector units. The scheme will be largely modelled on the successful Emergency Credit Line Guarantee Scheme (ECLGS) for small businesses that was unveiled in 2020 amid the pandemic, but will cover larger loans, with guarantee up to Rs 100 crore.
Source: The Financial Express
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