ECONOMIC PERSPECTIVES | Budget 2025: Behind the BJP’s Plot to Consolidate the Middle Class Vote Bank

If an element of surprise is the hallmark of a good budget, then Finance Minister Nirmala Sitharaman can pride herself on having won the day on February 1. In a briefer-than-usual Budget speech, reflecting impatience to get to the end, she concluded with an unexpectedly large tax break for the tax-paying middle classes. The tax-free income level has risen from Rs.7 lakh to Rs.12.75 lakh and revised rates in different tax slabs give substantial benefits to those required to pay income taxes. That concession results in an estimated Rs.1 lakh crore of potential direct tax revenue forgone, according to the Minister.

While speculation about some tax benefits for the middle class, especially salary earners, had been rife leading to the Budget, the scale of the concession surprised many. As many cartoonists humorously pointed out, the concession does not benefit the many unemployed, nor does it help the large proportion of the working population that does not fall within the income tax-paying bracket. But the sops did win the Finance Minister urban middle class praise and diverted attention from the fact that the rest of the Budget carried little of substance.

Budget and politics

As expected, many commentators saw in the Finance Minister’s largesse a dominant political objective. Elections in middle class-dominated Delhi, where the Central government led by the BJP has been utilising its special powers over the NCR (National Capital Region) to challenge the incumbent Aam Aadmi Party, were just days away.

The decision to heed the “voice of the middle class” and reward the “admirable energy and ability of the middle class in nation building” with tax giveaways is obviously politically motivated. So are the benefits for Bihar, chosen for special mention in the Budget—a greenfield airport; money to extend, renovate and modernise the Western Koshi Canal system; and a new board to support makhana (fox nut) cultivation (more than 80 per cent of which is in Bihar), to name a few. Bihar too goes to the polls later this year. A political agenda more than anything else drives this year’s Budget.

Providing for that agenda must, however, have posed a challenge for the Finance Minister. The National Democratic Alliance’s (NDA) embrace of neoliberalism has already been costly in terms of revenues forgone. Tax forbearance, concessions for big business, especially the sharp reduction in corporate tax rates in September 2019, and the broken Goods and Services Tax (GST) regime it took over from the United Progressive Alliance (UPA) and owned, have all eroded the Centre’s revenue base.

That erosion was for some time “managed” by accessing “exceptional resources”. Revenues were squeezed out from the legitimate shares of the States by relying on cesses and surcharges not included in the pool of taxes that must statutorily be divided between the Centre and the States. The cesses administered by the Department of Revenue, which include those on crude, motor spirit, and diesel, and the agriculture and infrastructure development cess, garnered an average of Rs.1.2 lakh crore annually during 2022-25.

In 2024-25, large volumes of non-tax receipts were mobilised through the sale of spectrum (Rs.1.23 lakh crore), procurement of special dividends from cash-rich public enterprises (Rs.55,000 crore), and enforced transfers of large “surpluses” from public sector banks and the Reserve Bank of India (RBI) to the Centre’s Budget (Rs.2.3 lakh crore). This helped finance corporate tax concessions, some capital spending, and limited allocations for different welfare schemes linked to the ruling party and Prime Minister Narendra Modi, even while the Finance Minister could claim in successive Budgets that she is more or less sticking to the path of fiscal consolidation by limiting fiscal deficits so as to reduce and stabilise the ratio of the Central government’s debt relative to the gross domestic product (GDP).

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However, the fiscal squeeze is back in place. The exceptional sources of revenue have reached saturation point. The government’s efforts at mobilising “non-debt creating capital receipts” excluded from the calculation of fiscal deficits through privatisation have not been too successful.

“Miscellaneous capital receipts”, consisting largely of funds mobilised through those means, have consistently fallen short of Budget estimates by a large margin. While budgeted at Rs.61,000 crore in 2023-24, the actual receipts were only Rs.33,122 crore. The budgeted estimate was reduced to Rs.50,000 crore in 2024-25, whereas receipts as per the revised estimates are 52 per cent lower. Yet, to help the Finance Minister manage her accounts on paper, the Budget for 2025-26 estimates these receipts at Rs.47,000 crore. There are, however, limits to squeezing out exceptional resources at the expense of the States, public sector enterprises, and the RBI.

Slowing growth, lower consumption

Meanwhile, growth is slowing, with little disagreement on the view that the deceleration is on account of dampened consumption demand, low investment by big business firms that are earning large profits, and inadequate public capital expenditure to take up the slack. What is noteworthy is that this reality has not just been recognised but emphasised by the official Economic Survey 2024-25. Realistically, growth in 2025-26 can be lower than even the 6.4 per cent to which it is estimated to have fallen in 2024-25 (from 8.2 per cent in 2023-24), unless something is done to boost demand.

The Budget reveals what explains this willingness to be candid about the state of the economy and the factors underlying the deceleration in growth. It provides the economic justification for sops doled out in the Budget to consolidate a middle class vote bank mobilised using a majoritarian agenda.

In post-Budget press conferences and media interviews, the Finance Minister and Finance Ministry mandarins argued that the tax concessions for middle class income tax payers are designed to boost consumption demand and restore dynamism to an important driver of growth in the economy. That it simultaneously responds to calls from the middle class vote bank for concessions is a collateral benefit.

Justifications and expectations

They also argued that the Budget provides for a hike in Central government capital expenditure by 17 per cent (in nominal terms) relative to revised estimates for 2024-25. Together, the increases in consumption spending induced by tax concessions and in government investment included in the Budget are expected to spur private investment as well.

At an MGNREGA workers’ protest in New Delhi on December 6, 2024. The latest Budget has not increased the employment guarantee scheme’s outlay despite greater demand for work in rural areas.
| Photo Credit:
SHASHI SHEKHAR KASHYAP

The claim is that the candid recognition of the factors underlying growth deceleration has been accompanied by measures that would reverse the slowdown. And the assertion is that this is a Budget that proactively seeks to counter the growth slowdown.

However, the formulators of this year’s Budget insist that these efforts to boost demand have not diverted the government from its medium-term strategy of fiscal consolidation ensured by reducing fiscal deficits so as to reduce and stabilise the ratio of the Central government’s debt to GDP.

The fiscal-deficit-to-GDP ratio, which is estimated to have fallen from 5.6 per cent in 2023-24 to 4.8 per cent in 2024-25, is slated to fall further to 4.4 per cent in 2025-26. However, this self-promoting hype cannot conceal a number of disconcerting features of the Budget.

Deflationary budget

To start with, Budget 2025-26 is not expansionary but deflationary in nature. The sacrifice of revenues to woo the middle class and the self-imposed restraint on borrowing result in total nominal expenditure rising by just 7 per cent, even with optimistic assumptions about revenue buoyancy and non-tax receipts.

That implies no real increase in spending after adjusting for inflation, despite ambitious expectations for miscellaneous capital receipts, and estimated receipts in 2025-26 of Rs.3.25 lakh crore from dividends, profits, and surplus transfers from public sector enterprises and the RBI. The latter reflects an increase of more than 12 per cent relative to the previous year’s high.

If aggregate expenditure increases are limited, the claimed sharp increase in capital expenditures can occur only if other expenditures are curtailed. The axe here falls on welfare expenditures of various kinds, including on erstwhile flagship programmes that the NDA government inherited and then claimed credit for.

The outlay for the national rural employment guarantee scheme, having fallen from the revised estimate of Rs.89,400 crore in 2022-23 to Rs. 86,000 crore in 2024-25, is expected to stay at the same level, even though wage payments are in arrears and demand for jobs is high. The NREGA Sangarsh Morcha—a platform of trade unions, organisations, and individuals engaged in public action on NREGA—estimates that the average number of workdays under the employment guarantee scheme has come down from 52 to 45 days between 2023-24 and 2024-25, and wage arrears amounted to around Rs.6,950 crore as of January 25 this year. With funds from stagnant allocations for next year being used to clear these arrears, employment generation through the scheme is likely to be even lower.

Inside a Hyundai Motor India plant in Tamil Nadu’s Kancheepuram district. The Budget has proffered several benefits to big business.
| Photo Credit:
BABU/REUTERS

Similarly, the food subsidy bill for an enhanced safety net under the National Food Security Act, having fallen from Rs.27.3 lakh crore in 2022-23 to Rs.19.7 lakh crore in 2024-25, is projected to touch just Rs.20.3 lakh crore in 2025-26. Meanwhile, farmers who have been agitating for a fair deal in a system with glaring corporate and urban biases have been left high and dry.

Not only has the demand for higher minimum support prices in keeping with the Swaminathan Committee’s recommendations been ignored, the allocation for the Department of Agriculture and Farmers’ Welfare has been increased only by a marginal 4 per cent in nominal value.

It is by cutting expenditures on crucial social welfare and protection schemes like these that the money to finance tax giveaways is sought to be mobilised. To make such giveaways look dramatic, the NDA government has adopted the strategy of paying off favoured economic interest groups at different points in time and through different means. If the corporates were offered a tax bonanza in 2019, it is the turn of the salaried and tax paying middle class this time.

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There are, of course, other benefits proffered to appease big business and foreign investors, for example. A committee has been set up to deliver further “regulatory reform” and improve the “ease of doing business”. This is despite the Economic Survey showing that deregulation has widened income disparities, with booming corporate profits and stagnant worker earnings.

There are incentives for foreign investors as well. The ceiling on foreign ownership in the insurance sector has been hiked to 100 per cent from 74 per cent, despite the evidence that such firms can be ruthless with clients when pursuing profits. The government has also promised to dilute India’s “model” bilateral investment treaty template and make it more investor-friendly, ignoring the evidence that investor-friendly treaties are means by which firms and sovereigns in less developed countries are held to ransom by transnational conglomerates.

Clearly, the perception is that while the poor and the working classes can be ignored without much political cost, the rich and middle classes cannot be passed over. Neoliberalism, which the ruling party embraces, is after all a “class project”.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts, Amherst, US.