Tax giveaway may boost consumer spend. But govt capex is slowing. So, net effect on economy may not be much

Budget becomes a talking point when people see what’s in it for them. Sitharaman’s latest script checks that box. After years, there’s an effort to leave more cash in the middle class’s hands. A day after nudging corporates to be less stingy with wages in the Economic Survey, govt’s shown the way by forgoing some of its pound of flesh. Is it a visionary move? Will it muster the missing animal spirits? Time will tell. But great or not, this budget is shaped by circumstances and its result will depend on many unknowns.

Context | FMs don’t fix what’s not broken, so if Sitharaman is willing to give up Rs 1L cr in income tax next fiscal �10% of the target in FY25 �she must have a reason. Which is that India isn’t growing fast enough to be a developed country by the centenary of Independence in 2047. The asking rate is 8%, the going rate is 6.4%, and by govt’s own admission FY26 may not be very different. IMF sees India’s GDP growth averaging 6.5% until 2030.

Then there’s the problem of skewed consumption, which govt didn’t address when SUV sales kept rising for three years after Covid. The going seemed good then because the rich were splurging, even though demand for mass market items was tepid. The growth rate shot up to 8.2% in FY24. All was well �until it wasn’t. The malaise is reflected in services like trade, hotels and transport that remain below their pre-Covid trend. Private investment has been sluggish despite solid balance sheets because producers have idle capacity. And with Trump back in White House, exports-led growth looks less certain.

Strategy | Govt’s first impulse after Covid was to spend its way out of the slump, hoping the private sector would follow suit, creating jobs and increasing private consumption, which accounts for 60% of GDP but grew at just 4% last year. That strategy hasn’t worked, hence the attempt to shore up demand by leaving money in the ordinary taxpayer’s hands. Initial calculations show taxpayers �depending on income �will have from a few thousand to Rs 1.1L extra annually to spend next fiscal. That could buy a two-wheeler �a segment that hasn’t touched its pre-Covid high yet �pay for some holidays or EMIs, or just push up demand for everything from toothpaste to refrigerators. But even if that happens, the impact on growth is unlikely to be dramatic. Tax giveaways in any case is a very short term strategy.

Some ifs | Ideas need a helping of luck too. What if the low end of the middle class that has been borrowing or digging into its savings to meet daily expenses, decides to save more, not splurge? And even if all of that Rs 1L cr is spent, will it compensate for govt’s slowing capex? Rs 93,000 cr less was spent than budgeted this fiscal year. For the next year, the capex increase is modest. Lower tax incidence might not be the silver bullet govt is looking for. Deep structural reforms are the only way to perk up growth. They are out of the budget’s scope but vital.

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This piece appeared as an editorial opinion in the print edition of The Times of India.

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