How Can India's Consumption Growth Be Revived?

Net tax burden on households now exceeds 20% of private consumption spending

- DHIRAJ NIM

Weakness in private consumption is at the forefront of India's growth slowdown. As the Union Budget 2025 approaches, the wish list of measures to boost consumer demand is growing, but the need to lower the fiscal deficit ratio remains pressing. A deep fiscal stimulus is unlikely, but a carefully-crafted one that boosts demand, tackles inflation, and ensures medium-term economic sustainability through structural reforms may do the trick.

Tax relief is an obvious option. The net tax burden on Indian households has surged in recent years. Personal income taxes, combined with net indirect taxes (indirect taxes minus government subsidies), now exceed 20% of private consumption spending, the highest level on record. However, the design of any tax relief will be crucial. An indirect tax cut may be more effective than a direct tax cut for several reasons.

A personal income tax cut would benefit only a small fraction of the population, as the vast majority do not pay income tax. Also, tinkering with the direct tax rate makes sense only when there is confidence over the medium-term fiscal sustainability. Aggregate direct tax collections have slowed unexpectedly, and reversing an income tax cut later, if needed for the sake of fiscal health, will be politically difficult.