Key Highlights:
- Try to Achieve Three Competing Objectives
- The Budget attempts to lower taxes, lower the fiscal deficit, and stimulate growth—three objectives that normally cannot go together.
- Capex Continues on Its Upward Trajectory
- Capex has grown from ₹3 trillion in 2019 to more than ₹11 trillion in 2024.
- The Budget bases its optimism on the hope that growth will no longer depend on expansion in capex, but driven by middle-class demand.
- Middle-Class Demand Revival Focus
- The middle-class consumer will, according to the government, now drive the economy. The only problem with that is no one knows where India’s definition of the “middle class” fits.
Middle-Class Definition
- 280-326 million registered vehicles in India suggest a large middle class.
- PM Modi’s “neo-middle class” estimate: 250 million people.
- 60% of India (800 million people) receives free food grains, meaning the middle class cannot exceed 600 million.
- Taxpayers vs. Middle Class
- 75 million tax returns filed in 2023, while 47 million paid no taxes. That is, only 27 million contribute, and these are the smallest fractions of the population.
- Can the richest 30 million people be called a “middle class” in a 1.4 billion population?
Impact of Cuts on Growth: How Effective?
- Justifications for Tax Relief
- Tax cuts are justified if they alleviate overburdened taxpayers’ cost burden, simplify the tax system, or broaden the tax base.
- However, they are unpredictable as a growth-stimulating tool.
- Historical Evidence Against Tax Cuts as Growth Drivers
- 2019 corporate tax cut (₹1.85 trillion loss in revenue) to increase investments.
- Outcome
- Only 0.1% of companies invested new, indicating very weak economic effects.
- Long-term US studies also have little association between tax cuts and long-run growth.
