Will India’s 2025-26 tax cut spur consumption and GDP growth?

Subscribe to enjoy similar stories. The tax relief provided in the Union budget takes effect from 1 April. Taxpayers can now expect more money left in their hands.

The big question is whether they will spend this money or not. No doubt, the relief was generally meant to ease the burden of India’s middle class, as defined by taxpayers—the vast bulk of whom are in tax brackets below the top-most slabs above annual incomes of ₹50 lakh that attract a surcharge. But it was also hoped that the extra money would be spent to drive demand and thereby help spin the wheels of India’s economy faster.

Such an outcome is predicated on beneficiaries opting not to save the benefits of this fiscal stimulus, or at least not most of it. The Centre’s budget has rejigged our liability in a way that makes income up to ₹12 lakh exempt from tax and cut what other taxpayers must pay by as much as ₹1.1 lakh annually. Theory and studies show that households lower down the pyramid have a greater marginal propensity to consume, given their relatively constrained standards of living.

So, we can expect many homes to spend their gains, giving the fiscal injection a fair chance of taking effect. At upper levels, in contrast, the cut may be too small to influence their spending. The disposition of millions in between could well determine the extent of its stimulus effect.

In a way, it would behoove gainers for whom the gains are discretionary to honour the government’s gesture by spending it all. Doing so would fuel demand, get factories to produce more, help multiply incomes where needed and stir up investments held back by weak sales forecasts. If a spending jump creates sufficient feedback loops, it would support GDP growth, which we must not let sag