Tax relief or economic mirage? The middle-class dilemma

As the income tax relief for individual taxpayers announced in the Union Budget on Sunday (February 1) sinks in, opinion is sharply divided over whether putting more money in the hands of the salaried taxpayer will actually help boost India’s consumption expenditure going forward.

India’s economic growth has been slowing and the first advance estimates put out by the government project the slowest GDP growth in four years this fiscal at 6.4 per cent, as urban demand stagnates, private investments fall, and sticky inflation punctures incomes and expenditures of the aam aadmi.

Consumption accounts for a lion’s share — around 60 per cent — of GDP and, at first glance, the tax relief appears to be a manna from heaven for the proverbial middle class, which has been struggling with dwindling incomes, falling household savings, and increasing expenditure on food, among other necessities.

As per one of the key personal income tax proposals made by Finance Minister Nirmala Sitharaman, salaried Indians earning up to Rs 12 lakh a year will now be exempt from paying any income tax. Till now, the limit was Rs 7 lakh and the exemption is applicable only if the salaried individual is part of the new income tax regime.

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Boosting consumption

Sonu Iyer, Partner and National Leader, People Advisory Services, EY India, said a salaried Indian with total income of up to Rs 12.75 lakh will not pay any income tax, since the tax rebate has been increased from Rs 25,000 to Rs 60,000. In a nutshell, this income tax relief provides additional money in the hands of the salaried taxpayers, which the government hopes will lead to a boost in consumption through increased buying of cars, mobile phones, daily need products (soaps, oil, shampoo) and consumer durables.

The FM said this income tax relief will lead to Rs 1 lakh crore in revenue foregone for the exchequer. Paresh Parekh, Partner and Retail Tax Leader, EY India said, “Rs 1 lakh crore of personal tax forgone is almost 6 per cent to 8 per cent of total collection. It is quite significant and more than expected, a decently large infusion of liquidity / disposable income in the hands of consumers and taxpayers. This should positively impact urban consumption.”

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Selective relief

Economist Rathin Roy termed the Budget a "Suit Boot Budget", saying it does nothing for the aam aadmi and salaried taxpayers were a fraction of the population in any case. So giving some relief to taxpayers does nothing for the vast multitudes of people who continue to pay the previous rates of indirect taxes on goods and services. Roy said in comments on CNBCTV18 that earlier, an Indian had to earn 3.5 times the national per capita income to even qualify as a taxpayer. But with the new income tax dispensation, this will mean the earning had to be six times the national per capita income.

Government data has put the number of income tax payers in India at less than 3 per cent of the population. At the end of FY23, 12.78 crore Indians paid any income tax at all.

And Jairam Ramesh, General Secretary and communication in-charge of the Congress, pointed out not one but four crises the Indian economy is faced with: stagnant real wages, lack of buoyancy in mass consumption, sluggish rates of private investment, and a complex and complicated GST system. “The Budget does NOTHING to address these illnesses. The only relief has been for income tax payers. What actual impact this will have on the economy remains to be seen,” he wrote on social media.

Cities lag, consumption growing in hinterland

There has been an upsurge in rural demand for biscuits, shampoo, hair oil, and even large cars even as consumers in urban pockets hold back purchases. While the resurgence in rural spending is good news for a large number of consumers facing businesses, it shows the deep distress which has been building across income segments in our large cities and many experts have been pointing out to the damage this urban-rural divide has caused to India’s overall economic growth.

A look at the third-quarter results of some of the country’s biggest corporate names shows the extent of urban distress and the buoyancy in rural buying. Maruti Suzuki India, the country’s largest car maker by sales, posted 15 per cent growth in retail sales across rural markets in the October-December period (Q3 FY25) this fiscal, while growth in retail sales in urban pockets was just 2.5 per cent. Hence, the difference in the growth rates between the two pockets was a significant 12.5 percentage points. Slowing urban consumption is the worry elsewhere too.

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Demand compression

Rohit Jawa, MD and CEO at Hindustan Unilever Ltd, India’s biggest Fast Moving Consumer Goods (FMCG) company, pointed towards slowing demand in general for FMCG products over the last six months to say that there has been “demand compression” in urban markets.

So, what is the urban consumer doing? The urban buyer, Jawa said, is shifting to smaller packs of biscuits, soaps, hair oil, and shampoo. While Jawa declined to suggest ways for India to improve its macroeconomic growth, he did say that the downtrading — urban consumers buying smaller, less expensive packs — would likely continue for another quarter or two.