Budget’s consumption gamble

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Buying vegetables in quantities upwards of 250 grams is a norm for households, but of late I have noticed a curious phenomenon. Outside a lot of metro and railway stations in Mumbai, which is a prosperous metropolitan city, there are vendors selling small portions of vegetables neatly packed in plastic bags. These portions are smaller than an average consumer would buy from a vegetable market.

While I thought this was for the convenience for your always-on-the-go Mumbaikar to pick up staples while returning from office, a commodity analyst told me that the reason for such sales is altogether different.

Inflation is too high and many people can only afford even smaller portions. Hence, some smart vendors have come up with this trick. While it helps in brisk sales, the consumer is also satisfied that she can get a slice of the unaffordable pie of her favourite veggie.

The analyst’s observation is supported by data. Inflation is very high and staple vegetable prices, which are part of the Indian government’s ‘thalinomics’, first mentioned in an earlier Economic Survey, have shot up significantly. On the other hand, the economy is not in great shape with GDP growth seen way below 7 percent for fiscal 2025 even by the optimistic forecasts. The National Statistics Organisation sees it at 6.4% while RBI predicts 6.6%.

The consumption conundrum

Amid this, the Union Budget has given a bonanza to the middle class in the form of tax relief, which is set to cost over Rs 1 lakh crore to the exchequer.

The need for consumption pick-up is urgent right now due to the economic slowdown; the GDP growth has dropped to 5.4% in the second quarter.

The Budget has certainly cheered the middle class with the exemption on income up to Rs 12 lakh of income. This means that people will have more disposable income in their hands.

But will it spur consumption? I have my doubts.

With new slabs pushing even more people out of the tax net, the number of taxpayers could shrink further. Meanwhile, Budget estimates assume a 14% rise in income tax collections, a projection that appears optimistic given wage stagnation and job losses due to AI and automation.

The bigger concern is the government’s slowdown in spending. Infrastructure investments have been a key growth driver in recent years, but real capital expenditure is now set to decline. This could hit sectors like steel, cement, and banking, leading to further job and wage cuts.

The real earnings of salaried workers have declined in recent years, particularly for women and the self-employed. Most of these workers don’t earn enough to pay income tax, meaning the Budget’s tax sops won’t help them. In an economy where wage growth is sluggish, and job uncertainty is rising, the expectation that tax cuts alone will drive consumption and investment appears misplaced.

The rupee is on a tumble and thanks to an ascendant dollar and looming trade wars, analysts have predicted that it can fall to even 95 a dollar. With the falling rupee, inflation is likely to worsen as the country is a net importer of fuel, for which it has to pay in dollars. Foreign travel and education have already become significantly expensive. Corporates are staring at shrinking margins as they have to pay more for their foreign loans, which are mostly tied to the dollar.

The silver lining for consumption is that a decent number of people are moving towards premiumisation. They are looking for healthy and organic products. Also, there are high chances that consumption will pick up only in the second half of FY26.

Will private capex revive?

The government’s decision to forgo Rs 1 lakh crore in revenue through tax cuts effectively transfers this sum into middle-class households, raising an important question—will this spur demand and drive economic growth?

If consumers choose to spend their additional savings, higher sales could push capacity utilisation levels up, encouraging private sector investment and setting the stage for a revival in capital expenditure. However, the impact of this transition will depend on how households allocate their extra income—whether they spend, invest, or use it to repay debt. Some experts believe that a portion of this money could flow into the stock market, which remains subdued.

For the economy to benefit, consumer spending must pick up significantly, triggering a cycle of higher demand, business expansion, and job creation. If this materialises, Budget 2025 could serve as a catalyst for India’s next consumption-driven growth phase. However, the real test lies in whether tax cuts alone can offset broader concerns such as slowing government expenditure and wage stagnation. Without a clear rise in incomes and employment, the expected consumption upswing may not be as r obust as policymakers hope.

If the government truly wants to boost demand, it must reconsider its spending priorities—especially in infrastructure and job creation—rather than banking on a narrow set of tax benefits that will not reach the majority of Indians.

Happy Reading

Amol Dethe,

Editor,

ETBFSI