Tax cut to shield India from global headwinds, boost private investment, says CEA

Chief Economic Adviser V Anantha Nageswaran (Courtesy: PTI photo)

The current geo-political and geo-economic uncertainties across the world are the driving force behind many of the announcements made in the Budget for 2025-26, including the tax cuts offered to India's salaried class to boost consumption, Chief Economic Adviser V Anantha Nageswaran said at an event in New Delhi on February 3.

"Although the Budget document or the Budget speech of the finance minister does not spell it out, it is quite clear, the current state of the world, in terms of geopolitical and geo-economic uncertainties is very much the driving force behind many of the proposals in the Budget, including the widely-discussed tax cut and revisions given to individual tax payers," Nageswaran said.

The Budget for 2025-26, presented on February 1, exempted people earning up to Rs 12.8 lakh per year from income taxes, raising the threshold from Rs 7 lakh earlier. It also made changes in the new tax regime across slabs to provide relief to all categories of India's salaried class.

Nageswaran said that the income tax relief can lead to increasing demand in the economy, thereby triggering more investments from the private sector.

"What it does is apart from boosting disposable income which they can choose to allocate to consumption or savings, in whichever proportion, but both would be positive economy. If it were to be directed towards consumption, it would boost aggregate demand, which is an important ingredient the private sector looks for to undertake capital formation," he said.

Nageswaran acknowledged the uncertainties faced by the private sector given global economic headwinds.

"There is a perception that the private sector has not been investing as much as we would like to see. I can understand the uncertainties the private sector is grappling with post-Covid, a war broke out in Europe and there was interest rate tightening after several long years of low interest rates, among others," the chief economic adviser to the finance ministry suggests.

However, Nageswaran said that data shows that private sector has been investing, but maybe not at the pace one would like to see, "but we cannot use the same benchmark for capital formation growth now that we used during the first decade of the Millennium."

"But the tax cut move reduces the demand uncertainty in the domestic activity and thereby gives a nudge to the private sector capital formation," he said.

The need for private sector to step up on capital expenditure gains significance at a time when the central government's spending on infrastructure seem to have peaked.

In the Budget for 2025-26, the Centre's outlay for capex was pegged at Rs 11.21 lakh crore, almost flat when compared to the initial estimate of Rs 11.11 lakh crore for the current fiscal.