India has maintained its position as the world’s fastest-growing major economy, driven primarily by government spending. The high growth propelled corporate profits-as a percentage of GDP- to a 15-year high in FY24 (4.8%) but hiring and wages have lagged behind. Retail inflation was 5.48% in November, softening from 6.21% in October in FY24 and is likely to close FY25 at an elevated 4.8%, according to the Reserve Bank of India’s forecast.
Reviving consumer demand is key to speeding up slowing growth-private consumption has about 60% share in India’s gross domestic product (GDP), which slumped to a seven-quarter low of 5.4% in the September quarter. Urban demand has been declining for five quarters. Middle and lower-income households are spending less, even on essentials. A cut in tax rates, leaving more in the hands of people, could likely spur consumption.
To be sure, the government last year raised the exemption limit under the new tax regime to ₹3 lakh from ₹2.5 lakh and also enhanced the standard deduction to ₹75,000 from ₹50,000.
Some experts are of the view that the limits need to be raised sharply, and automatically enhanced every year, benchmarked to inflation. The top 30% rate kicks in very early at ₹15 lakh annual income in the new tax regime and ₹10 lakh under the old one.
Additionally, personal income tax has grown at a faster clip. Between FY15 and FY24 corporate income tax doubled (112%) while income tax rose 294%.Will the February 1 budget bring cheer? It will all depend on how the economy performs. With corporate tax collection likely to stay sluggish, and the 4.5% of GDP fiscal consolidation roadmap to be met, it won’t be an easy call.
