The increase in the exemption level in personal income tax is likely to put pressure on inflation during 2008-09. The move would lead to generating a higher level of disposable income, especially in the hands of those belonging to the lower income category, which in turn may lead to a demand pressure.
The move is also expected to push deposit bases of the banks. The weakening of the capital market would also prompt individuals to park their additional funds with the banks. Importantly, this may ease interest rates in the next few months.
The government is under pressure to keep inflation under the 5% level. The Reserve Bank of India has been taking several steps to ensure that inflation remains under control.
Abheek Barua, chief economist, HDFC Bank told FE that though the increase in exemption levels could somewhat push bank deposits, it is going to be primarily channelised towards consumption. ?Typically, we find that with higher disposable income, there is an increase in consumption pattern especially in households falling under the lower income category,? Barua pointed out.
Saugata Bhattacharya, vice president Axis Bank added that there could be some increase in the deposit levels with the hike in exemption, which in turn may ease interest rates.
Bhattacharya added that a swollen deposit base would help banks to take steps towards reducing interest rates. Finance minister P Chidambaram has emphasised the need to reduce interest rates to push consumption while sustaining a high growth rate.
With the increase in exemption, an individual earning about Rs 1.5 lakh would be completely out of the tax net. Analysts said that both consumption and savings would go up. ?But it is difficult to assess the exact scenario at this stage. A clearer picture would emerge in the next five-six months,? an insider said.