Now that the dust has settled on the Union Budget presented in early February, opinions remain divided. Some hail it as transformative, while critics highlight its shortcomings. So, is it really a “bonanza” for the middle class, as some commentators have claimed?
Over the past three quarters of the financial year 2024-25, signs of a sharp economic slowdown have become evident, and recovery may take time. UBS Group AG has warned that India is entering a “structural slowdown” due to weak credit growth, declining foreign direct investment, and an overall economic deceleration. Meanwhile, global uncertainties loom, with Trump’s return to the US presidency raising fears of a trade war; he has already announced reciprocal tariffs for India from 2 April. This instability will likely impact global growth, and India will have to rely more on domestic drivers.
India’s annual GDP growth has averaged below 5 per cent since 2019 and just above 6 per cent since 2014—a trend that suggests the current slowdown is neither sudden nor unexpected. With a population of 1.4 billion, a 4 per cent growth rate would occur even without policy intervention, purely due to market forces. The real challenge lies in accelerating it beyond this baseline.
Achieving this depends in large part on strengthening domestic demand.
The spending slowdown
Consumption—or demand—is a key driver of economic growth. Despite a slight uptick in private consumption this year, overall demand remains sluggish.
Household consumption expenditure is the largest contributor to GDP and a direct indicator of economic well-being. When people have surplus income to spend on vehicles, consumer goods, and services, it sets off a virtuous cycle: rising production, fresh investments, job creation, and further demand growth.
Historically, household consumption expenditure in India has averaged 69.1 per cent of the GDP (1960-2023). However, recent figures tell a different story: 61.1 per cent (2020), 60.95 per cent (2021), 60.94 per cent (2022), 60.34 per cent (2023), and 61.97 per cent (2024 Q3).
These numbers indicate persistently weak demand.
Few will feel the ‘middle-class bonanza’
This year’s Budget was marketed as a “tax bonanza for the middle class”. The key announcement was a tax exemption for incomes up to Rs 12 lakh, alongside tweaks benefiting those earning up to Rs 25 lakh, who stand to save Rs 1.1 lakh annually. A marginal reduction in the top tax slab was also introduced, though capital gains remain taxable. These measures will result in a revenue loss of Rs 1 lakh crore for the government.
But will this truly boost consumption? To assess its impact, we must first define the Indian middle class—an ambiguous term.
Estimates of India’s middle-class population range between 350 million (35 crore) and 450 million (45 crore), often suggesting that India’s market surpasses even the European Union’s. A 2023 report by People Research on India’s Consumer Economy (PRICE), titled ‘The Rise of India’s Middle Class’, projects this demographic to grow from 432 million (43 crore) in 2020-21 to 715 million (71.5 crore) by 2030-31 and 1.02 billion (102 crore) by 2047.
These projections define a middle-class Indian as someone earning Rs 1.09 lakh to Rs 6.46 lakh per year (2020-21 prices) or Rs 5 lakh to Rs 30 lakh annually per household. However, AY 2023-24 income tax data paints a different picture.
Of the 75.46 million (7.54 crore) salaried individuals who filed tax returns, 58.92 million (5.89 crore) earned less than Rs 7 lakh and were already exempt from tax. With the new Rs 12 lakh exemption, the number of tax-exempt salaried individuals will rise to 67.76 million (6.77 crore) in 2024-25.
Thus, the Budget’s “middle-class bonanza” will directly benefit only 88.4 lakh salaried individuals—a fraction of the 43 crore Indians classified as middle class. Given this, the actual boost to private consumption remains uncertain.
Also Read: Housing is not a smart investment for the Indian middle class anymore
Beyond tax cuts—need for structural reforms
Sustained consumption growth requires more than just tax breaks. It requires the next generation of structural reforms. India’s complex GST system remains a major hurdle that needs urgent restructuring and simplification. The finance minister’s attempt to differentiate between ordinary popcorn and caramelised popcorn is a classic example of unnecessary complexity. A simpler, more transparent GST structure would encourage spending without creating confusion.
Beyond tax policies, a deeper issue is how many Indians actually have the disposable income to drive demand.
A widely discussed report by Blume Ventures further challenges the prevailing middle-class narrative. Despite India’s 1.4 billion population, only 130-140 million individuals belong to the “consuming class”—those with sufficient disposable income to spend beyond basic necessities. That’s just about 10 per cent. Whether one agrees with this report or not, it raises an important question: how many Indians genuinely belong to the middle class?
While the Union Budget 2025 offers tax relief to a segment of salaried individuals, its impact on overall consumption remains questionable. India’s economic challenges require broader structural reforms, including GST simplification and investment-friendly policies, rather than relying solely on tax cuts. More clarity is also needed in defining the middle class, as estimates vary widely and often fail to reflect actual spending power.
For India to sustain strong economic growth, policymakers must go beyond optics and focus on fundamental reforms that boost demand, encourage investment, and create jobs. Only then will the “middle-class bonanza” translate into real economic momentum.
The author is a former finance secretary to the Government of India and chairman, Institute of Development Studies Jaipur. Views are personal.
(Edited by Asavari Singh)
I would submit that there are three major flaws in your analysis.
Your main argument that the budget has not helped a substantial chunk of the middle class is as follows:
_“These projections define a middle-class Indian as someone earning Rs 1.09 lakh to Rs 6.46 lakh per year (2020-21 prices) or Rs 5 lakh to Rs 30 lakh annually per household. However, AY 2023-24 income tax data paints a different picture.
Of the 75.46 million (7.54 crore) salaried individuals who filed tax returns, 58.92 million (5.89 crore) earned less than Rs 7 lakh and were already exempt from tax. With the new Rs 12 lakh exemption, the number of tax-exempt salaried individuals will rise to 67.76 million (6.77 crore) in 2024-25.
Thus, the Budget’s “middle-class bonanza” will directly benefit only 88.4 lakh salaried individuals—a fraction of the 43 crore Indians classified as middle class. Given this, the actual boost to private consumption remains uncertain.”_
*The Flaws in Your Argument:*
1. _*Misinterpretation of Income Tax Data Trends*_
You rely on income tax return statistics from Assessment Year (AY) 2023-24, which represents Financial Year (FY) 2022-23, when the income was earned. You assume that the same income distribution pattern will persist in future years. However, incomes generally rise over time due to economic growth, inflation adjustments, and career progression. Many individuals currently earning below ₹7 lakh will likely move into the ₹7-12 lakh bracket in the coming years. Thus, relying on AY 2023-24 figures to estimate the number of beneficiaries under the new tax slabs understates the actual impact of the policy, as it applies three years later.
2. _*Incorrect Timing of the New ₹12 Lakh Exemption*_
The Finance Minister’s announcement of the ₹12 lakh tax exemption was introduced in the Union Budget 2025-26 and applies to Financial Year 2025-26, corresponding to Assessment Year 2026-27. This means taxpayers will benefit from this exemption on income earned between April 1, 2025, and March 31, 2026, when filing tax returns in AY 2026-27. However, you imply that the new exemption applies in 2024-25, which is incorrect. If you meant FY 2024-25 or AY 2025-26, both assumptions are mistaken.
3. _*Misleading Comparison Between Beneficiaries and Middle-Class Population*_
You claim that the budget’s tax relief will “directly benefit only 88.4 lakh salaried individuals—a fraction of the 43 crore Indians classified as middle class.” However, this comparison is misleading:
o The 88.4 lakh taxpayers benefiting from the tax cut do not represent individuals but households, covering 4.42 crore Indians (assuming an average household size of 5). This is a significant portion of the middle class.
o Furthermore, the 88.4 lakh figure is based on FY 2022-23 tax return statistics, which do not reflect the income shifts that will occur by FY 2025-26. By then, many more individuals will qualify for the exemption, making the actual number of beneficiaries much larger.
*Conclusion:*
Your analysis underestimates the impact of the tax exemption by relying on outdated data, misapplying the effective timeline, and making misleading numerical comparisons. The new exemption will benefit a far greater number of middle-class households than you suggest, and its positive impact on consumption and financial well-being will be more substantial than your argument acknowledges.
Article feels incomplete , even this expert doesnt seem to know in detail what is to be done to improve demand .
What a stupid article. First up, this was a long pending demand from the biggest income tax payer bracket, the middle class. That it would have some impact on consumption is moot. Also, where did the govt say that this is the only thing they will/are doing to revive the animal spirits in Indian economy?