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Published 15:38 IST, February 1st 2025

Income Tax Cut Will Boost India's GDP? Ex Chief Economic Advisor Decodes Equation

In the Union Budget presented on Saturday, FM Nirmala Sitharaman gave a tax rebate to income of up to Rs 12 lakh per annum.

Reported by: Business Desk
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'Income Tax Cut Will Boost India's GDP?
'Income Tax Cut Will Boost India's GDP? | Image: Linkedin

Krishnamurthy V Subramanian, former Chief Economic Adviser of India, on Saturday, lauded India's budget reforms and said that the consumption for FY 2026 will increase by over 10 per cent. In a comment on X, Subramanian also gave a detailed calculation on how the increased spending capacity of India's middle class will boost the GDP growth by 8 per cent. 

Budget 2025: KV Subramanian Explains How Income Tax Rebate Will Boost GDP

“I estimate consumption in FY26 will ↑↑ by >10% and GDP will ↑↑ by >8%,” Subramanian said in his post. Explaining the logic behind the calculation, Subramanian said that according to the FM's Budget 2025 speech, the tax forego due to PIT is about ₹1 Lakh cr. This is a direct increase in the disposable income of the middle class," he said.

Noting that the middle class saves about 20%, Subramanian added that ‘80% of this in disposable income will go into consumption’. 

Budget 2025: KV Subramanian Explains 

“Now, we can estimate what will be the total increase in consumption due to a decrease in PIT. From GDP estimates consumption (real) in FY25 is ₹104 Lakh cr. As 5/104= 4.8% drop in PIT will deliver an additional increase in consumption of 4.8%. So, I estimate ↑ in consumption in FY26 to be 4.8% + 7.2% (as estimated in step #5) = 12%," he added.

In the Union Budget presented on Saturday, FM Nirmala Sitharaman gave a tax rebate to income of up to Rs 12 lakh per annum. 

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Updated 22:26 IST, February 1st 2025