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India's Union Budget 2025, strategically focused on reviving private consumption, which constitutes 60% of the nation's GDP, addresses the persistent sluggishness in both urban and rural consumption observed since the previous fiscal year. The budget acknowledges the challenges faced by urban India, grappling with high inflation and subdued salary growth. Data from 802 listed companies reveals employee expense growth of merely 7% in the last fiscal and 6% in the first half of the current fiscal, a significant drop from the 15% growth witnessed in fiscal years 2022 and 2023. This decline is reflected in the FMCG sector, where leading companies reported modest volume growth of 2-4% in the first half of the current fiscal, contrasting sharply with the 9% pre-pandemic growth in fiscal 2019. Similarly, the automotive industry experienced flat passenger vehicle sales in the first half of this fiscal, compared to a 3% growth in fiscal 2019, further underscoring the subdued consumer demand.
The budget's strategy to revitalize consumption focuses on enhancing disposable income and providing targeted support to rural communities. Revised tax slabs under the new income tax regime will increase the disposable income of individuals earning Rs 1,275,000 annually by up to Rs 83,200, resulting in a maximum increase of Rs 1,14,400 in net cash in hand per annum across income categories. This measure is projected to stimulate spending on fast-moving consumer goods (FMCG), durables, and automobiles, particularly in urban areas. The impact is anticipated to be more pronounced for the middle class, who were disproportionately affected by the slowdown in the previous fiscals. For instance, while sales of PVs above Rs 10 lakh grew by 8% in the first half of this fiscal, sales of PVs below Rs 10 lakh declined by 7%, highlighting the disparity in spending patterns.
In rural India, the budget continues its support through existing schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and PM-Kisan, providing a short-term safety net. A crucial element is the increase in the Kisan Credit Card (KCC) loan limit to Rs 5 lakh from Rs 3 lakh, aimed at improving farmers' cash flow and enabling them to adopt more advanced farming techniques, thereby increasing crop yields. The budget also includes an increased allocation for schemes like PM-AASHA, which ensures fair pricing for agricultural produce, thus bolstering farmer incomes. A noteworthy development is the substantial 56% increase in the allocation for the Ministry of Food Processing Industries in FY26BE compared to FY25RE, with 71% of this increase dedicated to production-linked incentives. This investment targets infrastructure development, creating globally competitive processed foods, and organizing the sector to enhance farmer income and mitigate food inflation. The agriculture sector's challenges of low crop productivity and supply-chain gaps, including post-harvest technology limitations and weak market linkages, contribute to food inflation. Addressing these issues is crucial for long-term economic stability.
The positive impact on rural consumption is further reinforced by the recent recovery in tractor sales, following a decline in the first quarter of the last fiscal. This revival is attributed to favorable monsoon conditions, robust agricultural production, and better returns from rabi crops, driven by healthy reservoir levels, high commodity prices, and optimal rainfall. The agricultural sector's improved outlook, considering its significant contribution to rural household income, is likely to trigger a ripple effect across the broader rural economy. The combination of increased farm income and easing food inflation is expected to further stimulate rural consumption. The average food inflation rate between April and December 2024 stood at 8.4%, placing a significant burden on rural households, who allocate approximately 47% of their monthly per capita expenditure to food items, according to the Household Consumption Expenditure Survey 2023-24. The budget's measures aim to address this issue directly, by improving agricultural productivity, streamlining supply chains, and stabilizing food prices. Therefore, the overall impact of the budget is expected to be a significant boost in both urban and rural consumption, paving the way for better prospects for consumer staples and discretionary products and services.
In conclusion, the Union Budget 2025 presents a comprehensive approach to address the challenges of sluggish consumption, targeting both urban and rural segments through a combination of direct income support measures, investment in infrastructure, and agricultural development initiatives. The success of this strategy will depend on the effective implementation of these programs and the overall macroeconomic environment. The long-term sustainability of this recovery will hinge on continued efforts to address underlying structural issues within the economy, such as inflation, unemployment, and infrastructure gaps. Further analysis will be needed to assess the true impact of the budget's measures and their effectiveness in generating sustained, long-term economic growth. Ongoing monitoring of consumption patterns, both in urban and rural areas, will be crucial in gauging the success of this ambitious initiative and ensuring that its benefits are equitably distributed across various socioeconomic strata. The budget represents a significant intervention aimed at revitalizing the Indian economy by stimulating domestic consumption, a vital engine for overall economic growth.
Source: Union Budget 2025 boosts consumption in urban and rural India