Tax relief will help but cannot fix the Achilles Heel of households

Expect the weakened financial health of Indian households to constrain future spending and act as a drag on GDP growth

- NIKHIL GUPTA

The Indian government has announced a reduction in the indirect tax burden on consumers—to be achieved by rationalizing goods and services tax (GST) rates. This follows an increase in 2025-26 to 12 lakh per annum—almost five times our national per capita income—in the limit above which personal income tax is due, as stated in the Union budget. Are these fiscal policies, along with lower policy rates of interest, sufficient to revive consumer spending growth on a sustainable basis? These measures could support faster GDP growth in the near term. However, fundamental concerns over household finances will likely return after a few quarters, restricting consumption and thereby also GDP growth.

The share of private final consumption expenditure (PFCE) increased to a two-decade high of 61.4% of GDP in 2024-25 from its nadir of 54.7% in 2010-11, the first such increase since the 1970s. Notably, Indian households are large investors as well, with their investments making up 12-13% of GDP. Household spending (consumption plus investment), thus, accounts for about three-fourths of India's GDP, the highest among the world's major economies (the US proportion is 72% and China's 55%). This is why a strong financial position of India's household sector is a necessary (but not sufficient) condition for real GDP to grow at 8% or more on a sustainable basis.