Market is misreading the impact on tax savings on consumption, says Neelkanth Mishra

The announcements for power capacity have already been made, but investments have just begun. For the next 3-5 years, the focus should be on urban infrastructure, which is gaining traction.

While the post-budget dust is yet to settle, Neelkanth Mishra, Chief Economist, Axis Bank, said the market was misinterpreting certain economic signals and its impact amidst the heat of the Union Budget 2025 announcements.

“I’m quite surprised by how the market seems to be interpreting it (the impact of the budget proposals including tax breaks) all across the consumption sectors,” he said, suggesting that sectors like staples would not see an uptick as a result of these measures.

This assumes significance as Mishra is an authoritative voice in India’s economic policy-making – he is a part-time member of the Prime Minister’s Economic Advisory Council, part-time Chairman of UIDAI (Aadhaar) and a part-time member of the Telecom Regulatory Authority of India (TRAI).

Mishra suggested that while tax cuts will likely benefit certain high-income segments, their impact on broader consumption may not be as significant as the market expects. “The market didn’t interpret this correctly,” Mishra remarked.

Further, he warned that the broader notion of a consumption boom, driven by these tax cuts is misplaced. “Some believe this (the tax breaks) will boost consumption, I don’t think that’s the case. Personal income tax-to-GDP is still expected to increase by FY 2026, despite the tax cuts,” he said.

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“What really matters from a market perspective is, how the 70-75 lakh people earning between Rs 12 lakh to Rs 50 lakh, who are the biggest beneficiaries of these tax cuts, will use that discretionary income. That’s where the impact will be seen,” he says adding that this group of people fall in the 90th percentile of Indian households.

“More important than the current consumption is what is their incremental consumption? How is the consumption of the 95th percentile different from that of the 90th percentile?,” he says

According to Mishra, this group tends to move beyond spending on basic goods/staples to luxury items, discretionary purchases and financial savings.

“For these individuals, a reasonable part of the extra disposable income will actually be levered up,” Mishra noted, explaining how the increased income would flow into auto loans, mortgages, and other high-value purchases.

Mishra is of the view that of the Rs 1 lakh crore given away through tax breaks, the government expects to get back about a third in the form of indirect tax collections as people spend.

"So, this Rs 70,000 crore that is left after the 30% of savings would then get multiplied, because this will be used in a levered way," he emphasised, referring to the multiplier effect that these purchases could have on sectors like real estate and jewellery.

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“While it’s not considered part of household consumption expenditure, the real estate market (real estate is considered investment, not consumption) will likely benefit.” Mishra said.