The headline-grabbing aspect of Budget 2025-26 was the income tax concessions given to tax payers. According to the Finance Minister, the government heard the voice of the middle class and responded to their demand. It also helped that the Delhi elections were around the corner and a significant proportion of Delhi’s voters, especially government servants, were income tax payers. No one will grudge the relief given to the income tax paying class.
However, to put the beneficiaries of the income tax concessions in perspective, we should remember that of the 9 crore plus income tax return filers, only 3.2 crore pay any income tax. The remaining file nil tax returns.
The 3.2 crore is nota homogenous class. The number includes high net worth individuals as well as those whose income was just above the tax exemption threshold. Hence, while the benefit of the income tax concessions will go to those at the bottom of the income tax ladder, it will also go to those who are in the top rungs of the ladder.
Not all consumption
The government has claimed that Rs 1 lakh crore will be left in the hands of the middle class and they will spend and consume. They will indeed spend, but not all of the expenditure will be to consume domestically produced goods and services. Consumption of domestic goods and services will indeed give a fillip to the economy.
But a substantial part of the Rs 1 lakh crore will be used to pay old household debts, for saving, for travel or education abroad, and for consuming imported goods. Only the part that is spent on consuming domestic goods and services will trigger a higher growth rate. The effect of “consumption” of the Rs 1 lakh crore should not be exaggerated.
India’s GDP at the end of 2024-25 will be Rs 324 lakh crore. Rs 1 lakh crore amounts to a mere 0.3 per cent of the GDP. Can an additional private consumption of 0.3 per cent of the GDP make a significant difference to the growth rate? Private consumption is only one of four engines of growth, and a revving up of one engine by a notch may not compensate for the other slow-moving engines of growth or accelerate the vehicle tremendously. Consumption will contribute modestly but it is imperative to rev up the other three engines of growth.
The forgotten millions
If Rs 1 lakh crore is left in the hands of the tax payer, an equivalent amount of money is lost to the exchequer. The government will have Rs 1 lakh crore less to spend on capital expenditure or revenue expenditure including education, healthcare and social services. The multiplier effect of Re 1 spent on consumption is believed to be less than Re 1 of government expenditure.
Finally, according to the government’s Household Consumption Expenditure Survey (December 2024) the average monthly per capita expenditure (MPCE) in rural areas is Rs 4,226 and in urban areas is Rs 6,996. This is the average for the whole population. The average MPCE for the bottom 50 per cent of the population will be less and for the bottom 25 per cent will be much less.
The bottom 25 per cent and the bottom 50 per cent are the poor and the poorest of the poor. They also pay taxes such as GST and tax on petrol and diesel. What relief did the finance minister give to these people? Nothing.
The bottom 25 per cent and the bottom 50 per cent deserved relief. Data shows that real wages have stagnated in rural and urban areas for the last few years. Regular salaried jobs have decreased and self-employment has increased. The Economic Survey reveals the dismal state of affairs. Having heard the voice of the tax-paying middle class, the finance minister ought to have heard the plaintive cry of the poor and the poorest of the poor.
While the good point of the budget is the relief given to 3.2 crore people, the not-so-good aspect of the budget is the complete denial of relief to the rest of the population amounting to 140 crore people.
The author is a member of Parliament and former Finance Minister of India.