Budget 2025 tax cuts could trigger consumption multiplier and lead to 8% GDP growth rate: KV Subramanian, IMF
KV Subramanian, Executive Director, IMF, says the finance minister stated that tax cuts will put around Rs 1 lakh crore in the hands of the middle class. Middle class savings are roughly 18%, and if we round it to 20%, it suggests that 80% of this amount will be spent. The consumption multiplier, which is the inverse of the savings rate, is about five. Therefore, we can anticipate a total increase in consumption of around Rs 5 lakh crore, which represents about 2.7% of GDP. The GDP growth estimate is at 6.3% on the lower end. Adding that 2.7% could bring the total to 9%, and even with some overestimation, a growth rate near 8%, definitely above 7%.
What a Budget it turned out to be! What were the key bullet points that stuck with you from the Budget this time?
KV Subramanian: I have had an all-nighter here watching the Budget in Washington DC. And I think there are a few aspects that are really worth mentioning. As I tweeted just after the Budget, I did a quick analysis of the impact of the personal income tax rate cut on overall consumption and thereby on GDP. I think this is an aspect that is quite important. Unlike, for instance, infrastructure where the impact of that persists over many years, the impact of a personal income tax rate cut, which actually affects consumption, will be there for this year. But I think that impact is going to be large.
Overall, the finance minister mentioned that there will be basically about Rs 1 lakh crore revenue that is foregone and that is directly in the hands of the middle
