FM Sitharaman’s 8th Budget: what is fuelling expectations of a tax cut

The economic situation looks grim amid slowing growth and consumption, especially in urban areas. A weakening growth momentum of the economy, wherein India’s economic growth is seen picking up only marginally to 6.3-6.8 per cent in the next financial year 2025-26 from an estimated four-year low of 6.4 per cent this fiscal, any relief measure in the Union Budget for 2025-26 to spur consumption, scale up investments and employment is being looked forward to for boosting India’s growth.

Tax relief

The pre-Budget meetings in the ministries held in the national capital including the one chaired by the Prime Minister last month saw many participants admitting to India being a heavily taxed country. In the policy circle, India’s need to lower both direct and indirect taxes has been discussed in detail, while maintaining the need for the government to maintain the required pace of fiscal consolidation.

A relief on the front of personal income tax in the Budget, either in the form of a higher standard deduction or a tweak in rate slabs, especially at lower income levels to increase the disposable income in the hands of the people, are all measures that could spur consumption. The government is also expected to provide a broad outline of its roadmap for rate rationalisation on the indirect tax front under the Goods and Services Tax (GST) regime, even as it cannot announce any specific rate change as part of the Budget.

The measure could help accommodate the rising spending needs of the middle class, which have reeled under the impact of elevated inflation and stagnant wage growth..

Sops for MSMEs

Easier access to credit, extension of incentives and subsidies to MSMEs, have featured in the internal discussions in the government in the run-up to the Budget.

Employment-linked incentive scheme, which was announced in the FY25 Budget is yet to see the light of the day, will find a renewed push in the FY26 Budget. This would be crucial to step up employment growth in the MSMEs that are yet to reach the pre-pandemic employment levels.

As MSMEs account for a majority share of the labour-intensive exports in the country, contributing around 45 per cent to India’s total exports, the Budget is expected to provide a renewed support to export-oriented MSMEs in the form of extensions to subsidies and incentives.

Deep, bold reforms

Amid softening consumption and middling private investment, the clarion call is for the government to announce some deep, bold and significant reforms in the Budget. While the Economic Survey 2024-25 presented Friday pushed for deregulation as a reform measure at all levels of the government, the Budget can take it a step ahead by announcing more such reform measures to promote innovation, manufacturing and investments. A streamlined, well-defined industrial policy for export-oriented and labour-intensive sectors could be an important step in that direction.