Why Modi's Gamble In 2025-26 Budget On Mega Tax Relief Will Fail?

2025-02-05 12:18:13

(MENAFN- The Arabian Post)

By Nitya Chakraborty

The present euphoria among the BJP-led government ministers after the presentation of the 2025-26 budget in Parliament over the mega relief to the income tax payers of the country might be shared by the estimated one crore people in the country benefited due to the budget proposals. But in terms of its impact on the consumption behaviour among the people, it will be limited and not as big as the policy makers, including Prime Minister Narendra Modi, are projecting them to be.

The twin tasks of the 2025-26 budget, the second one of the Narendra Modi government in its third term, was one, pepping up consumption, since it was sluggish in the current fiscal, and two, speedy generation of jobs for the youth as unemployment has reached an extreme crisis point. On both these counts, the 2025-26 budget proposals hold no ray of hope. The animal instinct of the budget makers, especially the Prime Minister, is lacking in the budget though this was the best time for that since the Lok Sabha elections are four years away. The ruling government faces no immediate threat to its existence.

But the BJP led government took a half-baked approach towards pepping up of consumption and consequent demand in the economy and completely gave a go by to the job generation task. The net impact will be that there will be some ripples of consumption hike in a few sectors but the total tax relief of one lakh crore, will not be able to kick start the demand cycle as other factors including the poor spending capacity of the rural and urban poor will remain stagnant adversely affecting the process of a general spurt in consumption.

Let us look at the reality about the relief of Rs. one lakh crore to the income tax payers. As per the data revealed in the 2023-24 economic survey, among the salaried, real average monthly wage for the male workers in 2023-24 was Rs. 11,858 down by 6.4 per cent from Rs. 12,665 in 2017-18. For female workers, the real wages fell more sharply during this period. What does this mean? This means a substantial section of the salaried people, especially at the lower and middle bracket had to face worse living conditions even in respect of getting some essential goods.

This section will not go to spend for new goods, rather they will try to get back some essentials which they missed during this period. For instance, a middle class salaried person who retained one tutor for his education and had to do away with him in his crisis period, will try to have him back as a result of the relief. This section will not be a contributor to the pepping up of demand. The fall in real wages in the last few years will cripple the triple effect of the income tax relief bonanza on the overall demand position in the economy.

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That way, the multiplier effect of the income tax relief will be limited. This will have its impact on the private investors who will wait for more time during the next fiscal to assess the ground impact of the IT relief. The corporate sector has been the maximum beneficiary of the Modi government's policies in the last ten years. This process was more evident in the last five years. Profits climbed by 22.3 per cent in 2023-24 but employment grew by a mere 1.5 per cent.

While the personal tax collection in 2024-25 increased by 19%, from the previous year, in the case of corporate tax, the increase was only 7%. This means that the middle class income tax payers are contributing more to the government's tax revenues kitty compared to the corporate sector which has benefitted most during the Narendra Modi regime.

As regards the employment initiative in the 2025-26 budget, the latest report on the production linked incentive scheme is not at all promising in total though in some sectors, results have been encouraging. The CMIE's latest report in December 2024 puts the unemployment percentage at 7.8%. The India Employment Report 2024 noted that casual workers, who constitute 25% of the workforce, get a monthly wage of about Rs 4,712. Those in the self-employed category (who form 42% of the workforce) earn around Rs 6,843 per month.

The tax relief might help to alleviate the consumption distress among the middle class (with an annual income between Rs 5 and 30 lakhs) and lower income households (with an annual income between Rs 2 and 5 lakhs). They will be cautious spenders in the consumption market as they already have pent up demand for necessities including costs for education and health.. The majority of these groups are employed in the agricultural sector, self-owned businesses, and the MSME sector. Together, they make up 70% of India's working population with 400 million stuck in low productive agriculture sector and around 250 million in the MSME sector.

As leading economist Dr. Nilanjan Banik explained over the last few years, tax reforms have only benefitted the big corporate sectors. India's success story in manufacturing has traditionally been driven by a capital-intensive mode of production, with major corporates like Reliance, TATA, Birla, and others dominating the sector. However, these corporate houses are not able to create enough employment opportunities which is needed for sustaining consumption. India needs jobs for millions of youth in non-high tech sectors and by creating jobs in these labour intensive areas, only the Indian problem of joblessness can be solved.

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Between 2016 and 2023, people in the bottom 20 category has seen their income growth decline by 20% whereas those in the top 20 bracket has seen their income grow by 20%. The growth in income for this top 20 category is because of highly skilled new-age workforce (often foreign returned) like doctors, legal experts, engineers and MBAs working for the global consultancy firms and global capability centres of multinational based in India. On the other hand, a growing economy is also witnessing creation of low-paid and low-productive jobs such as housekeeping, security services, and other gig type jobs.

The entire approach of the Modi government in this budget is based on the so called multiplier effect of the relief of Rs. one lakh crore and projecting that the entire amount will be spent for consumption which is in reality not going to happen. Maximum Rs. 50,000 crore half of the total amount can be spent for new consumption. The people outside the income tax paying class will be struggling in the same manner without having any capacity to contribute to the demand for goods. The growth cannot take place by keeping majority of the population deprived of their spending power.

Just take a look at the dichotomy in the government policies. Flush with rupee funds, the country's rich and the upper middle class are spending big on gold purchase and foreign travel like never before. Forex is under constant demand. Its supply being limited, INR's exchange value on a daily basis is almost constantly dwindling. Large withdrawals by FPIs from the secondary market have further complicate the situation. In the first 11 months of 2024, India's gold import created an all-time record of $47 billion. Who are the beneficiaries? The Gujarat-based merchants trading in gems and jewellery.

Simultaneously, rich Indians spent a record $17 billion on international travel in the last fiscal showing a 25 percent increase over the previous year. The upper sections of the Indian population are flush with funds, while the people at the lower level are struggling to take care of the daily necessities for consumption. 2025-26 budget has no vision for improving the lives of the poor and the lower middle class. It follows the same path of jobless growth and widening of equality and no big thrust to pep up consumption by giving more money in the hands of the vast populations outside the income tax paying class also. Congress leader Rahul Gandhi was right when he said that this 2025-26 budget is like putting band-aid on bullet wounds. (IPA Service )

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