Recent Indian Fiscal reforms and its impact

 

The Great Indian Reset: Fiscal Reforms, Consumption Booms, and the AI Challenge

India is currently navigating a significant economic transition, marked by a "Great Reset" in fiscal policy and consumption patterns. Recent discussions highlight how the government is shifting away from heavy taxation on the middle class toward a stimulus-driven approach to revive the economy.

The Consumption Boom: A Tale of Silver and Cars

The festive season of 2025 served as a clear indicator of a consumption rebound. On October 18, 2025, India hit a historic milestone by selling 100,000 cars in a single day. This surge wasn't limited to automobiles; the demand for silver during the Dhanteras period was so intense that it exhausted local supplies and even caused a liquidity squeeze in the London bullion market, with major refiners like MMTC-PAMP and institutions like JP Morgan running out of stock. This boom was largely attributed to much-needed GST cuts that took effect in September 2025.

Fiscal Reforms and the ₹6.3 Trillion Stimulus

The primary driver of this macroeconomic shift is the unwinding of heavy tax burdens previously placed on the middle class. Between FY19 and FY25, income tax collections from the middle class doubled from ₹5 trillion to ₹10.5 trillion, representing a 17% CAGR. To reverse this, the government has implemented several reforms:

• Tax Relief: In the February 2025 budget, income tax was eliminated for those earning up to ₹12 lakhs.
• GST Reductions: Significant cuts in GST have been enacted to spur retail trade.
• Liquidity Injection: These tax cuts, combined with the ban on online gambling and a proposed curtailment of retail F&O (Futures & Options) trading, could inject roughly ₹6.3 trillion (1.8% of GDP) back into the economy. Even without F&O intervention, the stimulus stands at approximately 1.6% of GDP.

Structural Challenges: AI and the "Middle Income Trap"

Despite these fiscal boosters, structural risks remain, particularly regarding Artificial Intelligence (AI) and its impact on the labor market. The sources suggest that the traditional Indian economic model—where education leads to a stable office job, which then drives 60% of GDP through consumption—is under threat.

• AI vs. Traditional Employment: AI-oriented firms require significantly fewer people to achieve massive scale; for example, while Microsoft employs roughly 250,000 people, Open AI operates with 20,000, and China’s DeepSeek with only 2,000.
• The Middle Income Trap: There is a concern that India could fall into a "middle income trap," where the economic model that worked for a poor country fails as it reaches mid-income levels ($5,000–$8,000 per capita). Historically, countries like Brazil and various Southeast Asian nations have struggled to rebuild once their initial growth models were disrupted.

Infrastructure and the Multiplier Effect

While the government has spent heavily on infrastructure (highways, railways like Vande Bharat, and defense), these projects are increasingly capital-intensive rather than labor-intensive. Modern road construction now requires only about 1/5th of the labor it did a decade ago. Consequently, while the infrastructure is high-quality, its "economic multiplier" is modest because it doesn't generate massive middle-class employment.

The "Losing Games": Gambling and F&O Trading

A significant portion of middle-class wealth has been drained by speculative activities.

• Online Gambling: Before the ban, Indians were reportedly losing $8 billion annually to online gambling.
• F&O Trading: SEBI data indicates that retail investors—mostly men aged 30-40 from small towns—are losing $12 billion a year in the F&O market. This is described as a tragic transfer of wealth from the Indian lower-middle class to global institutional elites.

The Path Forward: The Gig Economy and Savings

As office jobs become scarcer due to AI, the sources predict a massive shift toward gig work, including data cleaning, bot training, and specialized consulting. Because gig income is more volatile than traditional salaries, there is an urgent need for Indians to increase their savings buffers. Currently, net household savings as a percentage of GDP are at a 50-year low, a trend that must be reversed to provide a financial cushion for the coming labor market transition.