MUMBAI: Neelkanth Mishra, Chief Economist at Axis Bank, believes that out of the Rs1 lakh crore given away in tax breaks, the government expects to recover about a third through indirect tax collections as people spend.
However, he cautions that the markets may be misreading the broader impact of these tax cuts on consumption.
“The market seems to assume that all consumption sectors will see a boost, but that’s not the case,” Mishra said. He pointed out that the biggest beneficiaries of these tax breaks – those earning between Rs12 lakh and Rs 50 lakh – are more likely to spend on discretionary goods, luxury items, and investments rather than on everyday staples.
Mishra, who is also a part-time member of the Prime Minister’s Economic Advisory Council, noted that while tax breaks increase disposable income, their impact on overall demand will be selective. “More important than current consumption is the incremental consumption – how does the spending pattern of the 95th percentile differ from that of the 90th percentile?” he asked.
Multiplier effect
A significant portion of the extra income from the tax breaks, he explained, will likely be leveraged through loans for housing, automobiles, and high-value purchases. This, in turn, will create a multiplier effect, benefiting sectors like real estate and jewellery, even though real estate is classified as investment, not consumption.
Despite the tax relief, Mishra pointed out that personal income tax-to-GDP is still projected to rise by FY26, meaning the overall tax revenue is not taking a major hit.
While there will be some boost in consumption, the widespread optimism seen in the market may be overstated.
