Growth had indicated a slowing trend as we headed into the Budget for FY26. This was largely being ascribed to a slowing capex cycle where not only the private sector capex had failed to pick up, but government’s capex cycle also was weak due to Union elections and some State elections. Having said, trends in private consumption expenditure indicated that the average growth in the post Covid phase is still weaker compared to the average growth in the pre-Covid phase.
Thus, a critical challenge for the government was to enhance the private consumption demand. True, with inflation having come down, real wage growth would become better. And RBI is also expected to start its rate cutting cycle soon, that would benefit private consumers whose loans are mostly linked to an external benchmark, mostly the repo rate.
However, the Budget did not want to leave this to chance and delivered a disposable income boost to the consumers by reducing income taxes. Salaried income upto Rs 12 lakh now would not attract any taxes. The tax slabs were also changed to benefit even persons at the higher tax brackets. Now a person earning Rs 12 lakh will see his tax burden reduced by Rs 80,000 while for a person earning Rs 50 lakh, the savings on tax outgoes will be Rs 1,10,000.
On one hand, additional extra amounts in the hands of people could once again provide the scope for consumer loans picking up, as the capacity for paying EMIs increase. Moreso, for persons with relatively lower income, this additional money can be used to repay past debt or for consumption. But, for persons with relatively higher income levels, this money could predominantly go into savings. For the financial sector, the offshoot of the tax proposals, therefore, could also be an increase in the deposits. Note that with net Household financial saving being weaker, this had led to a struggle for the banking sector to source deposits.
The Budget proposals for the MSME sector will surely go a long way towards boosting economic growth, given its 36% contribution towards manufacturing and 45% in exports. Even as the MSMEs contribute significantly to economic growth, they are more exposed to economic cycles than their larger counterparts who have a much larger capacity to survive shocks. While lending against a credit guarantee had enabled the MSMEs to survive the Covid shock, such enabled lending is seen to be improving the capacity of the MSMEs to provide a boost to the economic momentum. A Crisil report of February 2024 had indicated that formal credit penetration is only 20% for the MSMEs. This Budget announced an enhancement to the credit guarantee cover for the MSEs, startups, and exporter MSMEs. Further, the government has altered the classification criteria for the MSMEs that would make it easier for this sector to scale up their operations without looking the benefits that accrue to the MSMEs.
From a long-term perspective, the continuation of policies that look at inclusive growth, is likely to enhance the per-capita income levels of the population and benefit consumption demand. The government has also laid its focus on providing a boost to the labour-intensive sectors such as the toys manufacturing, footwear and leather and food processing units. Creation of storage chains, improving logistics, enhancing production and productivity of the farm sectors is expected to lead to an increase in the incomes of the people engaged in these activities and possibly lead to the hitherto unbanked segment of the population access to formal credit. The Budget also talks of a “Rural Prosperity and Resilience” programme that will address under-employment in agriculture.
Overall, the Budget is commendable as it seeks to enhance the productive capacity of the economy and reap the advantages that the demographic dividends provide. All this has been achieved without any fiscal push – in fact the fiscal deficit as a proportion of GDP is seen to contract to 4.4% for FY26.
(The author is Executive Director, YES BANK)