Budget 2023 is for the aam aadmi but will it spur consumption?

Indian Rupee

The Union Budget 2023 rejigged the personal income tax by increasing the rebate limit, with experts saying it will put more money in the hands of the people. Experts, however, are divided on how far it will boost consumption.

Presenting the Budget 2023, Finance Minister Nirmala Sitharaman gave a rebate on tax on income earned up to Rs 7 lakh, up from Rs 5 lakh earlier under the new tax regime. The basic exemption limit in the regime has been raised to Rs 3 lakh, up from Rs 2.5 lakh earlier.

Slab rejig

The number of slabs under the new IT regime has now come down to five from six. For taxable income of up to Rs 3 lakh, there is no liability. For incomes between Rs 3-6 lakh, it is 5 percent. For taxable income between 6-9 lakh, it is 10 percent. For taxable income between 9-12 lakh, it will be 15 percent. For taxable income between 12-15 lakh, 20 percent and for those with income above Rs 15 lakh, 30 percent.

Sitharaman said an individual with an annual income of Rs 9 lakh will be required to pay only 5 percent of his or her income or Rs 45,000 from Rs 60,000, a reduction of 25 percent on what is paid now. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 percent of his or her income, a reduction of 20 percent from the existing liability of Rs 1.8 lakh.

More cash to spend

The extra cash in the hands of people will mean more spending on brands, travel, among others. The tax exemption is a positive development for the lower end of consumption as the lower and middle class will have more disposable income, said analysts.

"The increase in their (salaried class) spending capacity due to reduced tax burden will allow them to spend on products such as two-wheelers and consumer durables, that continue to be the lifelines of this digital economy,” Aalesh Avlani Founder at Credit Wise Capital.

“This will put more cash in the hands of individuals, which will be utilized in investments. The additional liquidity will help improve the economic scenario as well, as it will enhance overall spending. A huge impetus has been given to the youth to make strategic investments and insurance will also witness a huge boost. The money saved from tax rebates is expected to be invested into health and life insurance categories," said Aatur Thakkar, Co-Founder and Director at Alliance Insurance Brokers.

Consumption push

It’s a very high capex spending budget so this is the government’s way of putting money in the hands of the consumer to revive consumption, said Rajat Wahi, partner, Deloitte India.

"There continues to be a lot of focus on agriculture such as the building of horticulture crops, fisheries and also setting up cooperative schemes in these areas. There is a clear focus on enabling the farmers and improving farmer incomes to improve their well-being as it has a direct impact on rural consumption. Hopefully, these initiatives will go into driving rural purchases of autos, tractors and FMCG products," said Wahi.

It is a common’s man budget, he said. "This is a pro-growth and pro-development budget which will eventually help the aam aadmi (the common man) and the Indian economy."

On the other hand, Ankur Bisen, senior partner & head, Technopak Advisors, said that the Budget is a mixed bag because there is no direct connection to measures that can spur consumption on an immediate basis.

"The tax rates have been standardised, there are relaxations in tax slabs and the announcement on the exemption limits so one would think that it would put disposable income in the hands of the consumers. But then there is a 30 percent tax rate on the Rs 15 lakh and above income bracket and that includes a lot of consumers who are doing aspirational consumption."

Rejigging of tax rates is a welcome move, though still a low base for the highest rates, said Ketan Dalal, MD, Katalyst Advisors. But, he added that, it will provide some relief to smaller taxpayers, and should release some funds for boosting consumption.

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Bisen also said that at the value end of the segment, the tax exemption should give some respite and motivation as far as consumption is concerned.

Increasing the capital expenditure outlay will have a multiplier effect on consumption because it creates jobs for real estate, construction workers. "This will create consumption opportunities in the lower income group segments," said Bisen.