Budget 2025-26: A regressive tax policy and shrinking fiscal space raise concerns

Finance Minister Nirmala Sitharaman’s Union Budget 2025-26, presented on Saturday, 1 February 2025 has sparked concerns among economists and industry leaders, with criticisms mounting over its regressive taxation structure, constrained fiscal space, and lack of significant measures for infrastructure and affordable housing.

One of the most contentious aspects of the budget is the impact of income tax changes on wealth distribution. Economist Rathin Roy has pointed out that the revised tax slabs have reduced the number of taxpayers, thereby benefiting the top 5-10 per cent of the population while increasing reliance on indirect taxes such as the Goods and Services Tax (GST).

Since GST is applied uniformly across income groups, the lower-income population now bears a disproportionately higher tax burden, further exacerbating economic inequality.

“The decision to lower direct tax liabilities comes at a cost of Rs 1 lakh crore to the exchequer. It will increase consumption for the affluent but does nothing for the aam aadmi,” Roy remarked on a show with CNBC TV18. He said that tax benefits were for those Indians who were earning 6 times the per capita income today.

The slowdown in revenue growth is another worrying sign. Christian de Guzman, senior vice president at Moody’s Ratings, highlighted that the government’s tax relief measures have constrained revenue receipts, which are expected to grow at their slowest pace since 2022-23.

Guzman warned that despite near-term fiscal consolidation efforts, India’s debt burden remains a long-term concern, with fiscal strength lagging behind investment-grade peers.

With limited fiscal headroom, the budget has forced a reduction in allocations for capital expenditure. Gaurav Dua, Senior VP and Head of Capital Market Strategy at Mirae Asset Sharekhan, noted that while the government had set an ambitious capex target of Rs 11 trillion for FY2024-25, the allocation remains unchanged for next year, leading to an effective decline when adjusted for inflation.

“The government has prioritised consumption-led growth, but this has left little room for infrastructure development. Additionally, a cut in defence allocations raises questions about long-term strategic planning,” Dua said.

While the real estate sector saw some indirect benefits, industry leaders were left disappointed by the absence of major measures for affordable housing. Anuj Puri, Chairman of Anarock Group, stated that the budget did little to address the demand-supply gap in the lower-income housing segment, a key sector that requires policy intervention.

“The budget delivers incremental gains for real estate, but the affordable housing sector remains neglected, despite its critical role in urban development and economic recovery,” Puri said.

Despite a forecast of 6.6 per cent GDP growth for FY2025-26, concerns remain over slowing demand from the middle class. Sakshi Gupta, Principal Economist at HDFC Bank, noted that while revised tax slabs could boost consumer demand in the short term, challenges from elevated inflation and stagnant income growth persist.

With government borrowings in line with expectations and expected rate cuts from the Reserve Bank of India, bond yields are likely to trend lower. However, experts caution that the budget’s structural weaknesses could limit long-term economic resilience.

While the government has attempted to balance fiscal prudence with populist measures, critics argue that the 2025-26 budget reflects a shift towards short-term political gains at the cost of long-term economic sustainability.

With tax reliefs benefiting the affluent, stagnating capital expenditure, and a failure to address pressing issues like affordable housing, the budget leaves key gaps unaddressed. While this budget may boost consumption for some segments, the cost of deepening structural imbalances that could weigh on India’s fiscal health in the years to come.