The Indian government has recently introduced an ambitious tax relief plan aimed at revitalizing its struggling economyHowever, this move has drawn scrutiny from various quarters, notably for allegedly neglecting a critical issue—rising unemployment.

On February 1, Finance Minister Nirmala Sitharaman presented a budget proposal that plans to raise the income tax threshold from INR 700,000 to INR 1.2 million, effectively exempting taxpayers earning below this new limit from paying income taxThis change is expected to benefit around 10 million individuals, increasing the total number of tax-exempt residents to 60 million, which represents a significant 74% of all taxpayers in IndiaAlongside this, she stated that the budget deficit for the next financial year will see a slight reduction, and there will be a moderate increase in infrastructure spending.

However, the timing of this budget has raised eyebrows, as India's economy is experiencing its lowest growth rate since 2020. Presently, the stock market is grappling with its worst monthly declines since 2001. Sitharaman asserts that this tax reduction will significantly alleviate the tax burden on the middle class, enhancing their disposable income and consequently promoting household consumption, savings, and investment.

Economists have reacted with mixed feelings towards this budget

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While some legislators from opposition parties protested against the tax relief plan, they argued that the focus leaned too heavily towards income earners, while the millions of unemployed citizens were left largely unaddressedOne prominent voice expressed this sentiment: “To benefit from the income tax reduction, you essentially need to be employedThe Finance Minister did not mention the issue of unemployment during her address.”

Amidst the simultaneous tasks of stimulating consumption and reducing the deficit, how is India navigating this treacherous economic landscape? Currently, the government anticipates that the growth rate for this fiscal year will hover around a mere 6.4%, markedly below the 8% annual growth rate needed to fulfill the ambitious economic goals set forth by Prime Minister ModiThe projection for the next financial year suggests slight improvement, estimating growth between 6.3% and 6.8%.

Since the end of September last year, foreign investment has seen a withdrawal of over USD 19 billion from the Indian stock market, leading to the worst monthly performance seen in over two decades.

Although this tax reduction is set to translate to a loss in government revenue, Sitharaman has set the budget deficit target for the coming fiscal year at 4.4% of GDP, a slight adjustment down from an earlier estimation of 4.5%. Increased transfers from the central bank and state-owned financial institutions are expected to mitigate some of the revenue decline.

On the expenditure front, this year's capital expenditure has underperformed expectations, causing the budget deficit to fall to 4.8% of GDP, down from prior projections of 4.9%. For the next financial year, capital spending is set to rise by an anticipated 10%, reaching INR 11.2 trillion.

Sitharaman stated, “We will strive to maintain our fiscal deficit each year, keeping the central government debt as a percentage of GDP on a downward trajectory.” She aims to achieve a debt level representing 50% of GDP by March 2031.

Despite the broad expectations surrounding the budget, economists are split regarding its outcomes

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Many assert that it has effectively balanced the control of the fiscal deficit with the encouragement of consumptionRadhika Gupta, CEO and Managing Director of Edelweiss Asset Management Ltd., noted, “This budget boldly addresses the pressing need for injecting funds into the middle class through meaningful tax breaksThis move is set to stimulate consumption and growth for the Indian economy during a critical timeframe."

Yet, some analysts argue that the revenue goals set for the future are overly ambitiousThe targets for infrastructure spending also appear to disappoint investors hoping for larger commitmentsAnubhuti Sahay, an economist at Standard Chartered Plc, commented, “In an environment where domestic growth drivers need to bolster against periodic slowdowns, the government's choice to shift from public capital expenditure to enhancing disposable income is appropriate.”

In contrary view, Sonal Varma, an economist at Nomura Holdings Inc., remarked that the budget's potential for growth in the next fiscal year would be “slightly positive.” Furthermore, the government’s fiscal prudence could potentially grant the central bank greater leeway for interest rate cuts, which could commence as early as next week.

Nevertheless, the plan has not escaped criticism from opposition parties

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Shashi Tharoor, a member of the Indian National Congress, criticized the tax reductions as benefiting primarily those with salaried incomes while failing to tackle the plight of millions of jobless citizensHe expressed, “To benefit from the income tax relief, you need to be employedThe Finance Minister did not address the unemployment crisis.”

Madhavi Arora, Chief Economist at Emkay Global Financial Services Ltd., pointed out that while the government forecasts a 14.4% growth in income tax revenue, achieving this in the context of economic slowdown and stagnating wage growth may pose a challenge.

Christian de Guzman, an analyst at Moody’s Ratings, added that India’s fiscal consolidation efforts still fall short of meeting the necessary criteria for a rating upgradeHe stated, “We do not expect the debt burden to decrease significantly.” Guzman emphasized that fiscal consolidation via expenditure cuts is essential for economic growth, but “you cannot cut spending forever

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