Former Chief Economic Adviser Krishnamurthy V Subramanian has hailed the personal income tax (PIT) cuts announced in Budget 2025-26, calling their impact on the economy “huge.” Reacting to Finance Minister Nirmala Sitharaman’s move to exempt annual incomes up to Rs 12 lakh from income tax under the new regime, Subramanian projected a significant boost to both consumption and GDP growth.
“The effect of personal income tax (PIT) cut is huge!!! I estimate consumption in FY26 will ↑↑ by >10% and GDP will ↑↑ by >8%,” Subramanian wrote, detailing his calculations on social media.
Breaking down the numbers, Subramanian highlighted that the tax relief would directly inject Rs 1 lakh crore into the hands of the middle class, increasing disposable income. Considering that the middle class typically saves around 20% of their income, he estimates that 80% of this additional disposable income will flow into consumption.
Using the consumption multiplier formula—1/(1 – MPC), where MPC (Marginal Propensity to Consume) is 0.8—Subramanian calculated a multiplier of 5. This suggests that the tax cut could drive an additional Rs 5 lakh crore in consumption. “This year, the increase in consumption is 7.3% with GDP growth of 6.4%. For FY26, even without the PIT cut, consumption growth was expected to be around 7.2%. With the tax cut, we’re looking at a combined growth of over 12% in consumption,” he explained.
For GDP, Subramanian estimates that the tax relief will add an extra 2.7% to growth, pushing the projected GDP increase from 6.3% (without the tax cut) to 9%. Even accounting for potential overestimation, he conservatively predicts GDP growth to exceed 8%.
Sitharaman’s Budget announcement also included a standard deduction, raising the tax-free income threshold for salaried taxpayers to Rs 12.75 lakh. The move is expected to benefit millions of middle-class individuals, giving them more spending power and, as Subramanian suggests, potentially driving a consumption-led economic surge.