Using a tax prod to goad the great Indian middle class
February 1 was a firecracker moment for the great Indian middle class. In her record 8th budget as finance minister, Nirmala Sitharaman announced a whole set of new income tax slabs, and a set of new tax rates that has India salivating. The direct tax regime has never had it so bad and the taxpayer in India has never had it as good. The government is proposing to sacrifice as much as Rs 1,00,000 crore in direct tax revenues, which would leave that much more money in the hand of the middle class.
This budget seems to signal a government recognition of the angst of the middle class, a segment represented by 570 million people, 38 percent of the population. While the bottom of the pyramid is blessed by government subsidies and freebies of every kind, the middle has been expressing deep angst. With jobs scarce, real-income growth next to negligible, inflation at 6 percent and the price of essential commodities skyrocketing, the bite was felt. The government stepped in and PM Narendra Modi spoke.
As the din around the “fire-cracker moment” settles, time to understand what the budget is actually trying to achieve.
First principles first. The clear first intent is to kickstart the sluggish consumption. The simple idea is to let there be more money in the hands of the spending class. This money will move into consumption. Consumption will then drive production, which will help capacity expansion by the private sector, and this in turn will create more jobs. More jobs mean more money to get the virtuous cycle of consumption into an overdrive. India needs to grow at least at 8 percent for several years to be a middle-income economy by 2030. The goal is clear.

Successive budgets presented by the BJP government have exhibited a cogent set of goals. Continuity has been a hallmark. These goals have seen positive policy actions delineated in every successive budget. While the intent is clear, the reality of the “real state” of the middle class will define the success or failure of this latest tax initiative. Add to it macroeconomic bad winds, particularly in terms of an unpredictable tariff regime that just might be unleashed by the brand new president of the US, and the year ahead promises to be exciting.
What could go wrong with this well-meaning budget that increases purchasing power in the hands of the great Indian middle class? I would suggest a bit more circumspection. More money in the hands of people does not necessarily correlate to more purchasing power. Do remember that the stressed middle class can use this additional money in more ways than one.
Firstly, wages have not shown the usual upward tick in a while. In difficult times, the traditional mindset sets in. Saving for a rainy day is a notion that is true-blue Indian. A government encouraging people to spend more is considered non-traditional and overtly aggressive. The Indian remains traditional when push comes to shove.
The common man has gone through enough of these pushes and shoves. When he heads to the market to buy, you witness price increases on common consumption items to be a bit too robust to his liking.
Downgrading from MNC brands to Indian brands and from big Indian brands to smaller ones have been reported from the marketplace in the year gone by. A further trend of moving back to commodity purchases from branded items has been reported from our rurban and Tier 2 towns. The big MNC and Indian MNC brands alike have felt the pinch. In reaction, they have either increased prices with a greater degree of caution or reduced grammage where possible.
But even shrinkflation has a limit. How much and how long will you tolerate the weight of your packet of tea reducing? The consumer has become cautious and sensitised to end consumer prices of consumption items. Let’s remember, 52 percent of all expenditure in the middle-class home is daily consumption items. Many homes have replaced many types of pulses in their consumption baskets, moving from more expensive to less. As this has a long term impact on nutrition, it has made the middle class sensitive to prices and inflation.
What’s to be expected then? There will be chunks of households that will continue buying their downgraded range as they have suddenly discovered value here. They will still buy the well-branded car, but when it comes to pulses and commodities, there is a new kid in town on purchase lists.
The warning is to expect the middle class to behave as three, if not more, distinct classes. The top-of-the-pyramid middle class, the middle-of-the-pyramid middle class and the bottom-of-the-pyramid middle class. The whole middle class is defined with a wide swathe of incomes ranging between Rs 6 lakh and Rs 36 lakh a year. Every segment will behave differently.
All this additional money in the hands of the middle class does not mean additional purchasing power alone. To some it will mean the ability to clear debt accumulated during the difficult years gone by. To others, it will mean the ability to pay back outstanding to the local grocer and money lender alike. To others, it will mean settling microcredits availed on credit card dues piled up and attracting interest. And to some others, it will mean saving the additional money at hand.
AI is today threatening to eat up jobs that were otherwise considered mundane and labour-intensive. In a job-stressed economy, saving is the first option to bite. Let’s remember that the Indian mindset is to manage within your means. In Kannada, there is a saying, “Chhape iddashte kaalu chaachu beku.” (Spread your legs within the size of the mat.) In tough times, we are known to listen to ancient wisdom.
Different segments within the middle class will behave differently with this additional money. We need to wait and watch what percentage of this Rs 1,00,000 crore will actually enter the consumption market. That will tell the success (or lack thereof) of this budget initiative.
Of all the reforms the government can attempt, land and labour reforms are the most difficult. Capital reform seems the easiest. Budget 2025 attempts this and the new Income Tax Bill that will be tabled in the week ahead hopefully attempts all this. Let’s see how the middle class reacts to it.
At the end of it all, I go back to my basic dream-dictum. The government must not tax income at all. A zero-income tax regime is the future. Income is hard-earned and comes by with difficulty. We toil for it. Tax expenditure instead. Expenditure is discretionary. You spend when you have money. In tough times, income cannot be planned. Expenditure can be planned. Direct tax is passe. Indirect tax is the future.
Harish Bijoor
Brand Guru and Founder, Harish Bijoor Consults
(Views are personal)
(harishbijoor@hotmail.com)