NEW DELHI – The Indian government has slashed income tax rates for individual taxpayers in its new budget in an effort to boost household savings and promote consumption aimed at revitalising the world’s fifth-largest economy.
On Feb 1, Minister of Finance Nirmala Sitharaman, while presenting her budget for the 2026 fiscal year in the Indian Parliament, said those earning up to 1.2 million rupees (S$18,800) annually will effectively no longer pay income tax.
This threshold was lower before at 700,000 rupees.
Acknowledging that the Indian middle class “provides strength for India’s growth”, Ms Sitharaman also reduced income tax rates for those earning more than 1.2 million rupees.
“The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment,” she said.
A tax relief measure was widely expected, with household savings plummeting to a five-year low in FY2023 and poor consumption demand becoming a drag on economic growth.
Parliamentarians from the Bharatiya Janata Party (BJP) greeted the announcement with cheers and thumped their desks loudly, while Indian social media erupted in celebration.
This budget was the first from the current Narendra Modi-led government after he was sworn in as prime minister for a third term in June 2024 with a reduced mandate that saw his party lose its majority in Parliament, as a lack of jobs, high inflation and falling income levels led voters to rein in support.
Gross domestic product (GDP) growth in India is expected to slow to 6.4 per cent in FY2025, the slowest in four years.
The government’s Economic Survey tabled on Jan 31 projected this figure would range from 6.3 per cent to 6.8 per cent in FY2026, suggesting continued sluggish economic growth amid frail urban demand as well as weak manufacturing and private investment.
These growth figures are lower than the sustained economic growth of close to 8 per cent for at least a decade that the Economic Survey prescribes for India to achieve Mr Modi’s ambitious goal of becoming a developed country by 2047.
Growth may also be further hampered by possible trade tariffs on the goods exported to the US that President Donald Trump has threatened to impose, crimping economic progress in Asia’s third-largest economy after China and Japan.
Ms Dipti Deshpande, principal economist at analytics firm Crisil, told The Straits Times that tepid consumption demand has been one of the factors deterring private investment, something the budget sought to correct with its tax rebates.
“This will support consumption in the short term and, by doing so, it also tries to push private sector investment in some ways because if they see consumption coming, they might want to go out and invest,” she noted.
The multiple tax relief proposals are expected to lead to a revenue loss of about 1 trillion rupees in direct taxes and 26 billion rupees in indirect taxes, but Ms Deshpande added that she expected “no major hit to government revenues” because the tax base has been widening with accompanying growth in income tax receipts.
Fiscal consolidation has been a key focus, and the government has targeted a fiscal deficit of 4.4 per cent of India’s GDP in FY2026, down from a revised 4.8 per cent for FY2025.
In her budget speech, Ms Sitharaman identified “four powerful engines” of growth – agriculture; micro, small and medium enterprises (MSMEs); investments; and exports – with multiple measures announced to try and boost each of these four sectors.
The government will launch a programme to enhance agricultural productivity in 100 districts, besides promoting crop diversification and sustainable agriculture practices.
Rural growth received a fillip, too, with the limit for subsidised credit for farmers being raised to 500,000 rupees from 300,000 rupees earlier.
The budget also announced missions to boost the production of pulses and develop climate-resilient high-yield seeds, something that could help tackle food inflation, which remained high at 8.39 per cent in December 2024.
It also promises better credit access for MSMEs as well as a new scheme for 500,000 first-time women entrepreneurs, especially those from marginalised groups, with loans of up to 20 million rupees for the next five years.
A slew of measures was also included to boost investments in human resources development – such as the creation of five “national centres of excellence” for skills training – as well as in innovation, with an allocation of 200 billion rupees for private sector-driven research and development.
Job creation also received priority with efforts aimed at boosting economic activity in labour-intensive sectors such as leather and textiles.
Tax reform measures were included as well, aimed at supporting domestic manufacturing capacities to help integration with global supply chains.
To enhance India’s investment appeal, the government announced the creation of a committee tasked to come up with recommendations to strengthen “trust-based economic governance” and enhance the ease of doing business.
A revamp of the current model of its bilateral investment treaty – which serves as a base for agreements with other countries to promote and protect foreign private investments in each other’s territories – is also in store.
Mr Sanjeev Dasgupta, chief executive of CapitaLand Investment (India), said in a statement that the move is “a welcome step towards providing greater clarity and confidence to global investors”.
He added: “By fostering a more predictable and investor-friendly environment, India is sending a strong message that it is open to sustained long-term capital.”
Opposition parties have, however, been critical.
Congress MP Jairam Ramesh said the budget had done “nothing” to address “four related crises” in the Indian economy – stagnant real wages, lack of buoyancy in mass consumption, sluggish rates of private investment, and a complex and complicated goods and services tax regime.
“The only relief has been for income tax payers. What actual impact this will have on the economy remains to be seen,” he added on X.
Several announcements were also dedicated to Bihar, a key north Indian state where the BJP shares power with a regional party and where assembly elections are scheduled to be held any time between October and November.
They include the creation of greenfield airports, a new technical education institution as well as one to boost food processing activities in the state and the adjoining region.
A greenfield airport is one that is constructed from scratch on previously unused or undeveloped land.
Accusing the government of ignoring other states, Congress MP Manish Tewari questioned if it was “a budget of the government of India or a budget of the government of Bihar”.
“Have you heard the name of another state (other) than Bihar in the entire budgetary speech of the union finance minister?” he said to news agency ANI.
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