Union Budget 2025 Focuses on the Middle Class

AMITAVA BASU

The social and economic group that falls between the working class and the upper class is referred to as the middle class. Typically, the middle-class has stable income and enjoys economic security, which enables them to maintain comfortable lifestyle, covering expenses like housing, healthcare, and education. There is significant increase in the size of the Indian middle class, expanding from 14% of the population in 2004-2005 to 39% in 2024-2025. It is projected that this growth will persist and the middle class will comprise 46% of the population by 2030 and 63% by 2047.

The middle class in India consisting of around 91 million households or about 432 million people is reshaping consumption patterns, driving industry growth, and contributing to economic stability in both urban and rural areas. The consumption pattern of this class of people has moved beyond meeting basic needs to include aspirational purchases, such as electronics, branded apparel, and luxury goods. In semi-urban and rural areas, sale of two-wheelers and smart phones have surged, signaling an increasing demand for quality products and better financial access. These evolving spending habits are fueling expansion in sectors like consumer goods, automotive, technology, and entertainment, further establishing India as a consumption-driven economy. By 2047, when India marks its centenary of independence, a flourishing middle class is set to become the cornerstone of a prosperous, self-reliant nation - driving innovation, bolstering economic resilience, and boosting global competitiveness.

In recent times, India’s middle class has been enormously stressed due to a number of factors. Inflation has been persistently high with retail inflation reaching a 14-month high of 6.21% in October 2024, putting pressure on the middle class, especially due to food inflation which spiked to 10.87%. Vegetable prices saw a significant rise of 42.18% compared to the same month in 2023, contributing to the strain on household budgets. Simultaneously, there is consistent slowdown in growth of wages. According to Elara Securities Inc, a global investment and advisory firm, the real wages for non-financial companies, adjusted for inflation, dropped by 0.5% from July 2024 to September 2024 compared to the corresponding time in the previous year. Declining rate of wages compared to rising inflation rate has further exacerbated the financial strain of the urban middle class. Besides, for years, successive governments have relied on the middle class as a steady source of revenue. Disposable income in the hands of the middle class has been further reduced due to tax on income. These factors have cumulatively caused a depressing effect on the income of the middle class. This has led the urban middle class, which is about 30% of the population, to curtail their spending. Consumers have cut back on everything from soaps to cars.

Consumption is critical to India’s economy, making up 63% of its GDP, with urban areas accounting for 60%. Signs of weakening consumer sentiment have emerged, with companies like Nestle, Hindustan Lever, and Britannia reporting lower sales. Fast-food chains like McDonald’s and KFC are also feeling the pinch, with sales declining as consumers tighten their belts. The reduced urban consumption influence investor sentiment, especially for major consumer brands, and prompt for reassessment of investments in Indian markets, particularly in sectors that depend on discretionary spending. However, rural consumption has been recovering due to good monsoons helping agriculture that is the mainstay in rural India; and government support through subsidies to the farmers and different development and job generation schemes such as Mahatma Gandhi National Rural Employment Scheme, Pandit Deendayal Upadhyaya Grameen Kaushalya Yojana, National Rural Livelihood Mission, etc. Yet, it is unclear if it can offset the slowdown in urban demand.

The middle class is more than just a consumer group. It is a powerful socio-economic force. The economic influence of the middle class also has political implications. Government cannot continue to overlook the interest of this demographic segment. It is important that the policymakers promote this demographic group through supportive economic policies.

In its budget for 2025-2026, government has focused on the country’s middle class to stimulate economic growth. On Saturday, the Finance Minister, while presenting the budget in the Parliament proposed that individuals earning up to Rupees 12 lakh annually will no longer have to pay income tax, and thus significantly raising the threshold limit of tax exemption from the present Rupees 7 lakh level. Considering the flat standard deduction, the salaried employees and pensioners are not required to pay tax up to Rs 12.75 lakh. The budget also proposes multiple measures to ease Tax Deducted at Source (TDS) that benefits the senior citizens. TDS threshold of 10 % withheld by banks for fixed deposit interest income earned by senior citizens is raised from Rs 50,000 to Rs 1 lakh from the fiscal year 2025-2026. Budget 2025 also raised the annual TDS limit on rent from Rs 2.40 lakh to Rs 6 lakh per year, significantly reducing TDS transactions for those receiving modest rental incomes. Tenants have to withhold TDS at the rate of 10 % before transferring the rent amount to their landlords. Since many senior citizens depend on fixed deposit interest and rental income during their retirement years, these measures will mean better cash flows and lower compliance burden. The Finance Minister has also proposed for reduction in income tax rates for those earning above this new threshold tax limit, aiming to boost domestic demand as global economic uncertainty persists due to potential new tariff barriers. The new structure will reduce taxes on the middle class, leaving more money in their hands.  This, in turn, will boost consumer demand and increase savings among the middle class, which has been grappling with high inflation and stagnant income growth.

Despite a slowdown in demand of the urban middle class, growth potential remains due to rural demand, a strong services sector, and increased government spending. These factors may help stabilize and adjust long-term economic forecasts. The government’s ability to manage inflation and ensure economic stability will be crucial in boosting middle-class consumption. Income tax relief combined with a substantial amount of about Rupess 1.5 lakh crore allocations towards loans to the states for capital expenditure is aimed to generate a multiplier effect potentially driving an additional of around Rupees 3 to 4 lakh crore in economic activity, thereby stimulating demand in important sectors. This approach is poised to significantly enhance rural incomes and bolster consumption, which are key for long-term economic growth.

In sum, the Union Budget 2025, presented by the Finance Minister, focuses on boosting consumption through providing increased disposable income in the hands of the middle class. If the petrol and diesel are brought under the purview of GST, the fuel prices are likely to decrease substantially, and would further enhance the income of the middle class. Be that as it may, the current budget proposal endeavors to improve sentiment, and revitalize the agricultural economy, with targeted investments in key sectors. The budget proposal aims to simplify the income tax framework and reduce surcharges, boosting investor confidence. Strategic investments in agriculture, mining, micro small medium enterprises, and Atmanirbhar initiatives align with India's self-reliant growth vision. The focus on consumption-driven growth presents investment opportunities, especially in the consumer durables sector. The budget sets a solid foundation for long-term economic growth, positioning India for inclusive prosperity.