The government in FY26 Budget should announce an “effective” personal income tax cut to support consumption and demand, Barclays said on Thursday.
In its FY25-26 Union Budget preview, Barclays said the key ask from the Budget, to be presented on February 1, is to support growth while adhering to fiscal consolidation path.
Barclays, India Chief Economist, Aastha Gudwani said in a quest to support consumption, the finance minister should provide an effective personal income tax rate cut by further tweaking the tax slabs.
This is unlikely to have a sizable fiscal cost.
“That said, improved tax buoyancy will likely make up for revenue foregone under this announcement.
“We think a boost to consumption is needed, especially with private investment also now awaiting the increase in demand growth,” Gudwani said.
Barclays expects Finance Minister Nirmala Sitharaman to announce changes to the new tax regime, making it lucrative for more and more taxpayers.
In the last Budget, the government had increased standard deduction for salaried taxpayer to Rs 75,000, and deduction on family pension for pensioners to Rs 25,000 under the new tax regime, which offers lower rate of taxes.
The new tax regime exempts income up to Rs 3 lakh. Those earning annually between Rs 3-7 lakh pay 5 per cent tax, Rs 7-10 lakh (10 per cent), Rs 10-12 lakh (15 per cent), Rs 12-15 lakh (20 per cent) and above Rs 15 lakh (30 per cent).
Barclays said another potential option to boost disposable income and purchasing power while containing inflation, could be a reduction in excise duty for fuel.
Retail prices for fuel have remained almost constant since 2022 despite lower global crude prices.
Barclays said customs duty announcements in Budget will be pivotal to understand government’s response to tariffs under Trump 2.0.
Given the uncertainty that Trump 2.0 brings along with, slower global trade and a fragmented world order is a reality India needs to prepare for.
“We thus expect multiple tweaks in customs duty structure, especially on items where dumping concerns from China are rising (eg, steel, glass, basic metals).
“We expect a modest increase in customs duty collections in FY25-26 vs FY24-25,” Gudwani said.
Barclays expects the government to overachieve the fiscal deficit target for current fiscal by 20 basis points, at 4.7 per cent of GDP and 2025-26 deficit to be pegged at 4.5 per cent of GDP or about Rs 16.3 lakh crore.
Barclays said it awaits the debt consolidation roadmap from FY26-27 onward to see by when the finance minister sees general government debt-to-GDP fall to the 60 per cent target.
The finance minister, in her 2024-25 budget speech, had stated that from 2026-27 onward, the endeavour of fiscal policy would be to maintain the fiscal deficit in a way that the central government debt is on a declining path as a percentage of GDP.
The fiscal rules envision general government debt to be 60 per cent of GDP with 2:1 ratio between the Centre and states.
This would mean the central government would have to reduce its debt from 57 per cent- plus currently to 40 per cent over the medium term.
These rules have been kept in abeyance ever since the pandemic struck in FY20-21, with the government only outlining the fiscal deficit target for FY25-26.
“Hence, in this budget, we would also watch out for the government’s proposed medium-term targets as mandated under its fiscal responsibility legislation,” Gudwani said.
Barclays expects nominal GDP growth of 10.5 per cent in FY26, up from an estimated 9.7 per cent in FY24-25.
