Sitharaman's tax cuts will only push Indian economy by 20 basis points: Study

Consumers will likely use part of the tax relief to reduce debt, which has risen sharply to about 52% of income now from 35% a decade ago.

Union Finance Minister Nirmala Sitharaman.

Credit: PTI Photo

India’s record tax cuts are expected to give only a limited boost to economic growth as consumers use the savings to cut back on their debt and the government curbs spending, according to an analysis by Motilal Oswal Financial Services Ltd.

The net effect of the $12 billion (Rs 1 lakh crore approx) in tax cuts announced in the annual budget will probably be a 10-20 basis point increase in the growth rate in the fiscal year starting April 1, Motilal’s economists Nikhil Gupta and Tanisha Ladha wrote in a note.

Consumers will likely use part of the tax relief to reduce debt, which has risen sharply to about 52 per cent of income now from 35 per cent a decade ago, the economists said. Any boost to household spending will be “offset by slower growth in fiscal spending,” they wrote.

Finance Minister Nirmala Sitharaman announced the tax cuts in her budget on Feb. 1 alongside only a modest rise of 10 per cent in infrastructure spending. Government expenditure on roads, ports and railways had been a significant driver of growth in the past, with spending increasing 30 per cent in each of the past fiscal years from 2021 to 2024.

More money in the hands of individuals will “surely” boost spending, but “there are several caveats to consider,” the economists said.