Opinion: Tax relief doesn’t resolve structural issues

A significant portion of the population does not participate in the tax system, limiting the potential impact of such relief on the broader economy

By Chirayu Sharma, Jadhav Chakradhar, Pravin Jadhav

The highly anticipated Union Budget 2025-26 was unveiled at a time when the Indian economy is facing mounting challenges. With the rupee experiencing continued depreciation, foreign institutional investors (FIIs) have been persistent net sellers since October 2024, and the stock market has witnessed a prolonged downturn.

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The expectations from the government had soared this time. Adding to the above concerns, India’s gross domestic product (GDP) growth declined from 6.7 per cent in August 2024 to 5.4 per cent in November 2024, reflecting a slowdown in the economic momentum. Against this backdrop, the Budget become a crucial policy instrument to restore investor confidence, stabilise macroeconomic fundamentals, and provide much-needed relief to businesses and households.

Tax Relief?
The government’s recent tax relief of up to Rs 12 lakh for middle-class individuals has certainly grabbed attention. Analysts suggest that this move puts more money into people’s hands, stimulating consumption and thereby reviving the overall demand in the economy.

While this is true to an extent, the reality is that this tax relief may be akin to offering a tissue to someone drowning. With India’s population of approximately 142 crore, only 8.09 crore income tax returns were filed in the fiscal year 2023-24, accounting for just 5-6% of the total population. This suggests that a significant portion of the population does not participate in the tax system, limiting the potential impact of such relief on the broader economy. As a result, it may not resolve the structural issues plaguing the Indian economy.

Historically, an individual was required to earn 3.5 times the national per capita income to become liable for income tax. However, this threshold has now been increased to six times the per capita income, as a result of which only the top 5-10% of the population is subject to paying income tax. This shift potentially diminishes the overall impact of tax relief on the broader economy. Consequently, this may contribute to a widening income gap between the wealthy and the economically disadvantaged.

Stock Market
The stock market is often a key indicator in assessing the impact of the Budget. In this case, the tax relief failed to elicit a positive response. The stock market indices reacted negatively, with the Nifty 50 closing lower. This decline indicates that the Budget did not meet expectations or align with market anticipations, contrary to what was expected.

Capital expenditure or capex is crucial for driving economic growth, but Finance Minister Nirmala Sitharaman has set India’s capex outlay for 2025-26 at Rs 11.2 lakh crore (approximately $130 billion), marking only a modest increase from the previous year. Many analysts have labelled this hike a negative development for the markets, placing pressure on industrial and infrastructure stocks.

This is clearly seen from the fall in shares like Larsen & Toubro, PNC Infra, and NBCC which dropped ranging from 3.3 per cent to 5.1 per cent with L&T being among the top three Nifty losers. The stock market’s negative response suggests that the government’s capex measures may not be enough to significantly boost consumption or drive robust growth in the economy.

Borrowing Target
The government has revised its gross borrowing target for FY26 upward by 5.7%, setting it at Rs 14.82 lakh crore, compared with Rs 14.01 lakh crore in FY25. While this may help narrow the fiscal deficit, it raises concerns regarding the overall health of the economy. Even the bond market has shown caution in response to the increased borrowing, reacting negatively to the announcement.

The borrowing target exceeded expectations, and following the Budget announcement, India’s 10-year benchmark yield rose by 0.016 per cent, reaching 6.694 per cent. There are also concerns about a potential further increase in this yield due to the higher supply of bonds in the market, which will be needed to fund the government’s additional borrowing.

The tax threshold has now been increased to six times the per capita income, as a result only the top 5-10% of the population is subject to paying income tax

Reflecting these concerns, Moody’s has maintained its investment rating for India, with a growth projection of 6.6 per cent. Earlier in January, Moody’s had downgraded India’s economic growth forecast to 7 per cent for the fiscal year ending March 2025, down from 8.2 per cent in the previous fiscal year. This rating poses a challenge for India’s economy, especially when trying to attract FIIs, which is crucial for sustaining economic growth. Upgrading India’s investment grade by rating agencies is essential, as it could trigger FII inflows, not only boosting the stock market but also strengthening the currency.

This Budget fails to address several key economic challenges, including currency depreciation, declining markets and the need to stimulate consumption. Furthermore, it has not met the expectations of analysts and market participants, leaving these critical issues unresolved. Structural concerns persist, as the Budget lacks significant programmes aimed at increasing employment and reducing poverty, which were widely anticipated.

(Chirayu Sharma is an independent researcher based in Pune. Jadhav Chakradhar is Assistant Professor, Centre for Economic and Social Studies [CESS], Hyderabad. Pravin Jadhav is Associate Professor and Head of Humanities and Social Sciences Department, Institute of Infrastructure, Technology, Research and Management, Ahmedabad)