The Union Budget 2024 has given a clear push to domestic consumption, particularly in urban areas, through a more liberal personal tax regime. With taxpayers earning up to Rs 12 lakh now exempt from income tax under the new regime, disposable incomes are set to rise.
The government is set to forgo tax of Rs 1 lakh crore on account of the largesse. This could drive higher spending across discretionary sectors such as automobiles, appliances, and consumer durables, offering a much-needed demand revival.
Fast-moving consumer goods (FMCG) companies, which have been struggling with sluggish urban demand, are likely to benefit as metro consumers regain spending confidence. The salaried class in large cities, under pressure from high inflation and stag nant wages, could now find relief, leading to a rebound in premium product sales. The impact could extend to quick-service restaurants and food delivery platforms, experts say.
The potential macroeconomic impact of a marginal increase in disposable income for the approximately 30-31 million workers in the middle-income group is minimal. However, some experts say that “middle class tax break” offers limited growth benefits, especially depending on where any additional disposable income is allocated.
According to the Economic Survey, 77% of individuals receiving direct transfers are using 44% of that amount for food and over 31% for loan repayments and essential services. As a result, the actual growth benefit from the tax relief—despite the change in tax slabs—will be restricted. This is further compounded by the higher inflationary pressures and the added burden of taxes and GST, which continue to strain the liquidity of middle-income households.
Rural consumption
Rural consumption, which has remained strong due to improved agricultural incomes, is expected to hold firm. While revised FY24 estimates indicate a shortfall in rural development spending at Rs 1.9 lakh crore, the Budget has set aside Rs 2.7 lakh crore for FY26, ensuring continued support for rural demand.
Beyond immediate consumption, companies could gain the confidence to invest in capacity expansion if demand remains strong. A sustained rise in sales could push utilisation levels higher, setting the stage for a private capital expenditure revival. However, the pace of this transition will depend on how consumers allocate their additional savings—whether they spend, invest, or repay debt. Some experts say that the additional money in the hands of consumers may also find its way into the stock market, which is currently down.
With an estimated revenue loss of Rs 1 lakh crore due to tax cuts, the government has essentially injected this amount into middle-class households. If spending picks up significantly, it could trigger a virtuous cycle of higher demand, business expansion, and economic growth—making this Budget a potential catalyst for India’s next consumption upswing.
