Potential consumer spending got a boost through a combination of changes in personal income tax, indirect tax reductions and an overall budgetary thrust on public investment.
An immediate impact will be felt through income tax changes which will put an additional Rs 1 lakh crore in the hands of tax payers. This is roughly 10 percent of the personal income tax collection in FY25. In other words, the government has returned Rs 1 lakh crore to consumers in FY26.
The outcome of the conditions is that the effective additional income in the hands of taxpayers for consumption may be lower than Rs 80,000, but it will still leave people with higher post-tax salaries.
Another boost for consumption will come from indirect tax changes, notably from lowering of basic customs duties of mobile phone inputs. It should lead to both more purchases and an intensification of the trend towards premiumisation.
The stock market responded immediately to more money in the hands of all income tax payers by pushing up the share price of key FMCG stocks such Hindustan Unilever and Britannia by over 5 percent above Friday’s closing while the BSE Sensex recorded just marginal gain.
Finance minister Nirmala Sitharaman said that direct tax changes would lead to an immediate revenue foregone of Rs 1 lakh crore. However, the consumption boost will lead to some of it coming back to the government in the form of GST.
Other than a direct consumption boost through tax changes, the budget’s continuing emphasis on public investment will help. Schemes such as 50-year interest free loans of Rs 1.5 lakh crore to states for the express purpose of capital expenditure will add to economic activity and incomes. As loans such as this have been in place for a few years, a shelf of projects exists. Consequently, another boost to consumption from the flow of income through public investment will be visible immediately.
The budget’s underlying approach of speeding up the momentum in private consumption, which in FY25 picked up sharply, will have a ripple effect across the economy. Private consumption which makes up about 56-60 percent of GDP is the pillar on which India’s economy rests.
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