In its February 19 bulletin, the Reserve Bank of India (RBI) stated that tax cuts in the Union Budget 2025, combined with easing inflation, are expected to boost consumer spending. Newly-appointed RBI Governor Sanjay Malhotra supported this view during the February MPC meeting. The bulletin also highlighted that the government has provided a Rs 1 lakh crore tax relief to the middle class, putting more money in their hands.
"On the direct tax front, the Budget proposes tax relief of Rs 1 lakh crore focused on middle-class taxpayers, which is expected to bolster household disposable incomes, and stimulate consumption, savings, and investment. In the realm of indirect taxation, revised customs duties target tariff simplification and address duty inversions," it stated.
The government aims to collect 12% of GDP in taxes in 2025-26, the highest since 2007-08. The bulletin noted that the tax relief is expected to increase disposable incomes, thereby boosting household consumption and investments.
The Union Budget 2025 raised the tax-free income limit under the new regime from Rs 7 lakh to Rs 12 lakh, with adjustments made to tax slabs across all income levels. The government anticipates a loss of approximately Rs 1 lakh crore in direct tax revenue and Rs 2,600 crore in indirect taxes.
The RBI bulletin stated that the Budget is encouraging increased spending while carefully monitoring its allocation. The capital expenditure-to-GDP ratio is projected to rise to 4.3% in 2025-26, up from 4.1% in 2024-25 (RE).
At the February MPC meeting, Governor Malhotra said, "rural demand continues to be on an uptrend, while urban consumption remains subdued with high frequency indicators providing mixed signals."
He added that "going forward, improving employment conditions, tax relief in the Union Budget, and moderating inflation, together with healthy agricultural activity bode well for household consumption.
The MPC also backed this view, saying, "household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26."
