Edit this postBudget2025: EFFECT OF PERSONAL INCOME TAX (PIT) CUT IS HUGE!!!
I estimate consumption in FY26 will ↑↑ by >10% and GDP will ↑↑ by >8%.
See step-by-step calculations below:
Step 1: I heard Madam FM @nsitharaman estimate in her budget speech that the tax forego due to PIT is about ₹1 Lakh cr. This is a direct ↑ in disposable income of middle class.
Step 2: Data shows that middle class saves about 20%. So, 80% of this ↑ in disposable income will go into consumption.
Step 3: Consumption multiplier = 1/(1-MPC), where MPC is marginal propensity to consume. MPC = 1 - Savings rate = 0.8. So, consumption multiplier= 1/(1-0.8) = 5.
Step 4: Combine with #1 above, ↑↑ in consumption will be = (consumption multiplier) * (↑ in disposable income) = 5* ₹1 Lakh cr = ₹5 Lakh cr.
Step 5: This year, ↑ in consumption is 7.3% on a GDP ↑ of 6.4%. So, for FY26, with expected GDP ↑ of 6.3%, ↑ in consumption can be estimated proportionally to be 7.2%. Remember, this is without the impact of the ↓ in PIT in #Budget2025.
Step 6: Now, we can estimate what will be the total increase in consumption due to ↓ in PIT. From GDP estimates (tinyurl.com/2s47xfxz), consumption (real) in FY25 is ₹104 Lakh cr. As 5/104=4.8%, ↓ in PIT will deliver additional ↑ in consumption of 4.8%. So, I estimate ↑ in consumption in FY26 to be 4.8% + 7.2% (as estimated in step #5) = 12%.
Step 7: Finally, what will be the impact on GDP? GDP (real) in FY25 is ₹185 Lakh cr. As 5/185=2.7%, ↓ in PIT will deliver additional ↑ in GDP of 2.7%. So, I estimate ↑ in GDP in FY26 to be 6.3% (w/o ↓ in PIT) + 2.7% (impact of ↓ in PIT) = 9%.
Final estimate: Let's allow for some over-estimation in the above. Even conservatively, consumption will ↑↑ by >10% and GDP will ↑↑ by >8%.
Win win budget by BJP govt. Kudos to FM
