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Informist, Tuesday, Feb. 4, 2025

 

NEW DELHI – The government's tax breaks announced in the Budget could increase India's GDP growth by 30 basis points in 2025-26 (Apr-Mar), QuantEco Research Tuesday said in a report. At the same time, the tax cuts are likely to have a "negligible impact on inflation", the report said.

 

The Budget announced that there will be no tax on personal income of up to INR 1.2 million and the government has also tweaked the income tax structure to aid savings and investments of individuals across the income strata. The revised tax slabs will lead to the government forgoing revenue of INR 1 trillion per annum.

 

Economists at QuantEco argue that the income tax cut has improved the outlook for urban consumption and the Private Final Consumption Expenditure component of GDP can increase by 60 bps. "It can have a larger multiplier impact – by incentivising production and investment, needless to add, over the medium term," the report said.

 

The Budget's tax breaks come at a time when India's GDP growth is estimated to fall to a four-year low of 6.4% in FY25 because of lower government capital expenditure and moderating urban consumption. QuantEco now projects FY26 GDP growth could be closer to 6.7%, while the Economic Survey has forecast next year's growth at 6.3-6.8%. 

 

The rise in disposable income of taxpayers from the tax cut is likely to be spent in part on staples such as food of higher nutritional value, discretionary big-ticket items such as vehicles, and on discretionary services such as travel. Of the INR 1 trillion of revenue foregone for the government, consumers may spend nearly INR 650 billion over the next 12 months, while the rest of the amount may be used to pay back debt or saved, the report said.

 

QuantEco sees a minor upside to core inflation in FY26 because the tax cut is expected to lead to higher demand. "Having said, visibility of demand may allow manufacturers to absorb a part of cost escalations, if any." The minor rise in core inflation may be offset by moderating food inflation next year, said QuantEco, which estimates FY26 CPI inflation at 4.3%.  End

 

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

 

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