Failing to make use of demographic dividend, the threat of walking into middle-income trap looms

The headline item on which the finance minister wants us (and Delhi's voters) to focus is the income tax break.

- MV Rajeev Gowda

The government had long delayed this relief to taxpayers. Economic mismanagement over the last decade has stressed household budgets. In 2023, private consumption fell to a 20-year low while household savings were at a 47-year low.

So, will the income tax cut boost private consumption? Hardly so, since the taxpaying middle class constitutes a small fraction of Indians. If the aim was to provide a broad boost to private consumption, increase demand, and tackle rising prices, it would have made more sense to cut taxes and cesses on petroleum, which burden the common person and farmer alike.

Income taxes contribute more than corporate taxes today. In 2019, corporates received a massive tax break costing the exchequer ₹1.45 lakh crore. The revenue foregone due to the income tax cut is estimated at ₹1 lakh crore. The corporate tax cut has not spurred the private sector to step up investment. Instead of investing in India, thousands of high-net-worth individuals are fleeing abroad. Hence, the Economic Survey's advice to the government is to "get out of the way" and bridge the trust deficit.