Tax Breaks Could Spur Urban Consumption, But Wage Growth Remains Crucial

India’s urban consumption has slowed down since FY24, primarily due to stagnant wages and tightened lending conditions. However, experts suggest that recent income tax cuts, falling inflation, and potential GST rate rationalisation could give urban spending a short-term boost.

“The cut in income taxes, interest rates and a GST rejig would give a boost to urban consumption,” said Paras Jasrai, Associate Director at India Ratings and Research.

Income Tax Relief for Middle-Class Earners

One of the key measures expected to uplift spending is the FY26 Budget’s income tax relief, which exempts individuals earning up to ₹12 lakh annually from paying taxes under the new regime. This step is designed to increase disposable income and encourage consumer spending in urban areas.

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Pending GST Reforms to Simplify Tax Structure

The government is also working to streamline the Goods and Services Tax (GST) by proposing to eliminate the 12% tax slab. This reform would reduce GST rates on many products to 5%, making goods more affordable and possibly encouraging higher consumption.

However, this GST rationalisation is yet to show significant progress.

Structural Challenges Remain

Despite these positive steps, economists caution that for a sustained recovery in urban consumption, deeper issues like low income levels and limited job creation must be addressed. Without improvement in wages and employment, the recent policy measures might only provide a temporary stimulus.

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