Union finance minister Nirmala Sitharaman had offered India Inc generous tax breaks last September. On Saturday, a sizeable section of around 7 per cent of working-age adults, who fall within the tax net in India, were given the option of a new deal as her budget proposals included a slash in the personal income tax rate for individuals for fiscal year 2020-21.

The first move by the JNU alumnus was based on a hope that the cuts would increase investments, result in jobs and spur growth, creating broader prosperity.

The new tax deal — lower rates for those earning up to Rs 15 lakh a year and no tax on annual income up to Rs 5 lakh, albeit without any exemptions — is aimed at leaving more money in the hands of people so that they loosen their purse strings, spend more and help the economy come out of the slowdown.

The other motivation behind the twin cuts must have been Sitharaman’s faith in Arthur Laffer, the Chicago University economist who had contended that high taxes would at some point discourage effort and reduce growth.

There have been debates over Laffer’s prescription for years as the Ronald Regan administration in the US didn’t reap the benefits that it had expected by slashing tax rates. In recent years, French economist Thomas Piketty and his colleagues concluded — after analysing economic data of over three decades from the developed world — that they found no meaningful correlation between cuts in tax rates and economic growth.

The Indian experience since the corporate tax slash also confirms the findings of Team Piketty as companies — despite enjoying higher earnings — have been reluctant to invest amid weak consumer demand, and the slowdown has only worsened since then. That the deceleration in growth is an economy-wide phenomenon has become clear in recent months with the poor show in key segments like agriculture, electricity, gas and water supply, hotel and transport, financial, real estate sectors and professional services.

Against this backdrop, an obvious question is why Sitharaman chose the path of offering tax breaks to the small group of tax-paying individuals at a time India’s growth is seen dipping to an 11-year low of 5 per cent in the current financial year and joblessness of youths has become a talking point across the country. Besides, ordinary people, who live mostly in rural areas, have cut spending even on food as real rural wages have contracted.

Over the past few months, economists have been discussing how the government can induce higher consumption in the economy, especially in rural areas, to revive demand and hence growth.