The FM has eased the income tax brackets for individuals and that is a very good news for urban consumer markets

 

The FM has eased the income tax brackets for individuals and that is a very good news for urban consumer markets - especially those in the large cities and metros. The new tax rates are as follows: below Rs 1.6 lakh annual income, nothing; between Rs 1.6 and Rs 5 lakh, 10%; between Rs 5 lakh and Rs 8 lakh, 20%; and above Rs 8 lakh 30%. Indicus has estimated the income distribution of Indian households. Across rural and urban India as many as 7.5 million households have those income levels, another 7 million in the Rs 5 to 8 lakh category, and slightly less than 45 million in the Rs 1.6 to 5 lakh category. These are households and not individuals, and income tax earners would be more in number - accounting for more than a single income earner in a household. But then a large proportion of households come under the unorganized sector component and are generally out of the tax net, so we do not know how much revenues the government expects to lose from this change of various tax brackets.

I could give you details of where this extra disposable incomes will be concentrated and among what kind of consumers -- and given the income elasticities -- would be able to predict quite well which items would see a spurt in demand. But this is not the place. Suffice to say that somewhere in the range of 10-15 million households would be impacted by this measure. But three forces will blunt the positive impact on demand. The first is inflation which has already crept into the manufacturing sector output. The second is the increase in interest rates that the RBI will have to institute. And the third is the partial rollback of the stimulus.

Overall however, we would see a positive impact on home purchases, durables, especially white goods, that are more likely to be purchased by those with organized sector employment and residing in larger cities. Premium products for the middle class - including higher end electronics - mobile phones, music systems, televisions etc will all have a significant impact. Moreover, given that the impact will be felt almost immediately expect far greater expenditures on travel and tourism as well as entertainment.

The inflation figures do not give a large enough weightage to any of these items, and we should expect this tax break to itself have an inflationary impact, especially for the affluent. But given our pre-occupation with food inflation, the government need not worry, politically at least, on this item.

Last what will be the impact on automobiles? The answer there needs to be qualified. Expect interest rate increases, expect significant price increases, and therefore there will be some tempering of demand on the one hand. At the same time this is a significant income give-away and there will be a demand increase. However a large proportion of the demand for both these items is coming from sectors that are anyway increasing their demand - rural unorganized for two wheelers and corporate and MSME sector for four wheelers - consequently the total positive impact would be minor.

All in all a good Budget for consumer markets in the short run. But beyond that, since it does not address the inflation problem adequately, all bets are off.

---

---