After Budget fires up hopes for a consumption boost, eyes on RBI for a double thrust

New Delhi: Following finance minister Nirmala Sitharaman’s proposed income tax relief for salaried individuals, India’s consumer industry executives are looking forward to a rate cut that could provide a further boost to fire up India’s sluggish urban consumption.

Consumption, particularly in urban markets, has been battered by high food inflation and low income growth in recent months, resulting in calls for the Reserve Bank of India to cut its policy rate to spur spending. 

The banking regulator in December maintained the repo rate at 6.5% for an 11th consecutive time. RBI’s monetary policy committee, its rate-setting panel, will next meet on 7 February.

Finance minister Nirmala Sitharaman on 1 February, in her budget speech for 2025-26, proposed that individuals earning up to ₹12 lakh annually would be exempt from paying income tax from 2025-26. This largesse, which will apply to individuals who have opted for the new tax regime, is expected to cost the government about ₹1 trillion.

“There will be a benefit of almost ₹1 lakh crore (trillion) in terms of tax forgo by the government. This level of consumption will be available in terms of disposable income,” said Abneesh Roy of Nuvama Institutional Equities.

“Food inflation also is correcting with prices of tomatoes and onions nearly normalizing. Some form of inflation is still there; however, higher interest costs should also start easing out because in February we do expect RBI to cut interest rates and that should help ease EMI (monthly loan repayments) outflow.”

More spending money

Under the revised income tax slabs, a tax payer in the new tax regime with an income of ₹12 lakh will get a benefit of ₹80,000 in tax (which is 100% of tax payable as per existing rates). Similarly, a person earning ₹25 lakh would get a benefit of ₹1.1 lakh, which accounts for 25% of their tax liability under the current rates, leaving individuals with more money to either save or spend.

“This budget would kickstart a virtuous cycle of consumption-led growth,” said Sanjiv Puri, president, Confederation of Indian Industry, and chairman and managing director of ITC Ltd.

Other industry executives also expect the income tax relief to help stem the slowdown in urban consumption and bring it back on the growth track. 

Also read | Budget 2025: Income tax cuts extend FMCG's winning streak

“The substantial tax relief measures, particularly making income up to ₹12 lakh tax-free, will provide essential financial respite to middle-class families, increasing their disposable income, encouraging spending, and promoting overall economic growth,” said Mohit Malhotra, chief executive of Dabur India. “This focus on the middle class addresses a long-standing demand and is a positive step towards a more inclusive and robust economy.”

The optimism was reflected in the markets. India’s fast-moving consumer goods sector welcomed the tax cuts with a 3% gain in the Nifty FMCG index—its biggest budget-day gain since 2012.

“The Union Budget rightly prioritizes reviving consumption by focusing on rationalizing the tax burden of the salaried class,” said Ravi Swarup, partner and consumer products practice head at consultancy firm Bain & Co. 

“The increase of the no-tax limit from ₹7 lakh to ₹12 lakh is a significant step in reducing tax and putting more money back into consumers’ hands. This will provide a much-needed boost to consumption, which has been challenging over the past 1-1.5 years,” he said.

Also read | Sitharaman’s income tax bonanza: Time to rejoice

A return to normalcy

Consumer goods companies, restaurants, and other discretionary businesses have struggled with muted urban demand for several quarters, particularly among middle-income households. Companies have attributed this sluggishness to weak real wage growth, high food inflation, and lackluster employment. 

Rural demand, meanwhile, has seen modest growth thanks to a favorable monsoon and a strong kharif crop.

For instance, urban demand for fast moving consumer goods products in value terms grew 0.5% in the December quarter, while rural markets reported a 5% year-on-year growth, according to data sourced from retail technology platform Bizom. 

The Budget lays a foundation for a more consumption-driven economy, said Aasif Malbari, chief financial officer, Godrej Consumer Products Ltd.

“Investments in rural development and job creation will boost economic activity and drive higher consumption, opening new opportunities for market expansion,” he said. “The National Manufacturing Mission is a strong step toward enhancing domestic production, reducing import dependencies, and improving cost efficiencies. Additionally, tax reforms benefiting the middle class will increase disposable income, further fueling demand across essential and aspirational FMCG categories.”

Also read | Budget 2025 | A ₹1 trillion largesse for India's middle class

Additionally, initiatives such as the agriculture-focused PM Dhan Dhaanya Krishi Yojana, which aims to support about 17 million farmers, are expected to enhance agricultural productivity and rural incomes, stimulating demand in rural India.

Dabur’s Malhotra said the government’s continued focus on rural infrastructure could boost consumer demand in the hinterlands as well.

The budget’s proposals could see demand returning to normalcy over the next two quarters, said analysts tracking the sector.

“With the middle class now driving nearly 60% of domestic consumption, rising purchasing power is likely to accelerate demand for aspirational and premium products,” said Gautam Singhania, chairman and managing director, Raymond Group.

Also read | In economy's shifting sands, a budget to boost demand