Union Finance Minister Nirmala Seetharaman, by effectively making income up to Rs 12 lakh tax free, has presented a dream budget for India’s middle class. Leaving more money in the hands of taxpayers, the step is expected to boost demand, kick off a multiplier effect, increase private investment and stimulate GDP growth.
The middle class, which accounts for about 31% of India’s population and makes up a core support block of the Bharatiya Janata Party (BJP), was beginning to feel discontented due to the huge tax burden on it. Reeling from high inflation, low wage growth not sufficient to cover the price rise, high taxation and meagre household savings, the taxpayer was feeling cheated to some extent. The fact that personal income tax collections had exceeded corporate tax collections had also added to the frustration.
‘Middle Class’s Energy’
The latest budget offers a huge relief against many of these concerns. Announcing the revised tax structure applicable under the new tax regime, Sitharaman said, “The middle class provides strength for India’s growth. This government, under the leadership of Prime Minister Modi, has always believed in the admirable energy and ability of the middle class in nation-building. In recognition of their contribution, we have periodically reduced their tax burden…Right after 2014, the ‘nil’ tax slab was raised to Rs. 2.5 lakh, which was further raised to Rs. 5 lakh in 2019 and to Rs. 7 lakh in 2023. This is reflective of our government’s trust in the middle-class taxpayers,” she added.
The new structure will substantially reduce the tax burden of the middle class. There will be no income tax payable on income of up to Rs. 12 lakhs. This limit will be Rs. 12.75 lakh for salaried taxpayers due to a standard deduction of Rs. 75,000. The revised tax rate structure is as follows: nil tax for Rs. 0-4 lakh: nil, 5% for Ra 4-8 lakh, 10% for Rs. 8-12 lakh, 15% for Rs. 12-16 lakh, 20% for Rs. 16-20 lakh, 25% for Rs. 20- 24 lakh, and 30% for income above Rs. 24 lakh.
Lose Some, Win Some
To illustrate, a taxpayer in the new regime with an income of Rs. 12 lakh will get a benefit of Rs. 80,000 in tax (100% of tax payable as per existing rates). For those earning more than Rs 12 lakh a year, tax slabs will kick in progressively. In effect, taxpayers earning Rs. 12 lakh can expect to save around Rs. 7,000 a month, those earning Rs. 18 lakh will save around Rs. 6,000, and those earning Rs. 25 lakh may save around Rs. 9,000.
With these changes, the Central government will forgo Rs. 1 lakh crore in direct taxes. However, the bulk of this money in the hands of taxpayers is likely to be spent on consumption, thus in a way leading to higher demand for goods and services. A section of this could also be recouped in the form of indirect taxes, such as GST, by the government.
Private consumption accounts for more than 60% of India’s GDP. However, over the last few years, especially after the post-COVID-19, it had grown at a very slow pace—around 4% in FY 2023-24—dragging the overall GDP growth down to a 6% level. Without a consumption boost, it would be hard for the economy to return to 8% GDP growth levels. The government perhaps realised this, that despite giving a tax break to the corporate sector in 2019, private investment as a percentage of the GDP had been sluggish. The government had so far been focusing on the supply side all these years, concentrating on boosting private investments that account for around 30% of the GDP, ignoring the 60%. Also, the private sector has long blamed low demand and low operating rates/capacity utilisation (in the 70s) for their dull approach towards new investments.
Getting Into Action
Now, with these tax breaks, the middle class is expected to get into action by consuming more and setting into motion a multiplier effect. The Rs. 1 lakh crore stimulus is expected to provide a fillip to demand, and, in turn, lead to a rise in the operating rates and capacity utilisation of corporates. The increase in demand for goods and services will also kick in an investment cycle, providing a boost to GDP growth.
The announcements are also politically significant in the backdrop of the Delhi assembly elections. It has been trying to woo the middle class in the capital, which tends to swing between the BJP and the Aam Aadmi Party (AAP) in the Lok Sabha and assembly elections. The party has long been targeting the AAP on the alleged liquor scam and the ‘Sheesh Mahal’ controversy in order to rock the AAP’s anti-corruption plank and sway its middle-class support.
Politically, the BJP hopes this budget could sway the kingmaker middle class in Delhi and propel it to power. And, on the economic front, the growth stimulus can provide the foundation for getting India back to 8% GDP growth levels. It’s a win-win.
(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)
Disclaimer: These are the personal opinions of the author