[DRAFT] Budget Day 2025: a real-time argument over the multiplier

This post is the first in a new series — The Tantri Files — pulling Prof. Tantri’s verbatim commentary from the Finance Enthusiasts WhatsApp group into long-form pieces, with his blessing. Student questions are paraphrased and anonymised; his words are not edited.

The Finance Minister read the FY 2025–26 Union Budget on the afternoon of February 1, 2025. The headline: a sharp cut in personal income tax, paid for by an equally sharp slowdown in government expenditure growth. Within hours, the WhatsApp group lit up with the standard takes — this is huge stimulus, the multiplier will kick in, consumption is back — and within hours, Tantri began tearing them apart, one message at a time.

What follows is the full thread, in his words, in order.

Late evening, February 1

A classmate, sharing a tax-multiplier formula on LinkedIn.

Tantri. Folks, exp and tax cut are very good for long term. However, if someone tweets etc that this will boost consumption, I will stand on the gate during graduation day. There is a decline in both G and T. Increase in disposable income is offset by decline in G. No short term stimulus. Don’t use formulae like 1/1‑MPC etc in linked in. That is wrong in this case.

A classmate: But what about the consumption multiplier?

Tantri. There is no stimulus. G is going down. Multiplier happens when you cut taxes but don’t cut expenditure. Here both are cut. You know what punishment is coming next.

A classmate: Are you saying this will reduce GDP, even in the short run?

Tantri. I am saying directly not indirectly. In the short run under the Keynesian framework. Long run is a different story.

A classmate: But surely households will spend the tax savings?

Tantri. He is ignoring the impact of G. Most people mix long term classical economics and Keynesian economics and say things which are not meaningful.

After midnight, February 2 — the family example

Tantri. Let me explain this with a simple story.

Assume that there are two people in a family. One is a govt employee (A) and the other one is a private sector employee (B). The salary paid to the former is G. It is paid out of tax paid by A. What the FM has done now is cut taxes of B and reduced the salary of A. In the short run, it does not change consumption.

Long term is different as prices are flexible. The question of efficiency comes. Then the MPC is not the framework to be used.

In fact, there is a subtle point.

Govt employee’s salary itself is a part of GDP. So when you cut it, there is a decline in G and also next round consumption effects. The tax cut itself is not a good or service. So the multiplier starts with Tc, Tc², Tc³ etc. In case of G, it is G + Gc + Gc² etc.

Do you see an extra G in the second term?

This — even if T = G — GDP will go down and not up under the Keynesian framework. Again, I repeat all this is short term. The question of efficiency comes in. Once again, this is a good move. But using MPC etc to justify this is plain nonsense.

A classmate, working through it: So the tax-cut multiplier is one term shorter than the spending multiplier?

Tantri. Excellent. Only you will get degree. Rest all fail.

A classmate: Then how would short-run stimulus actually look?

Tantri. That is stimulus. Then what Subbu says will happen — again under the Keynesian world. However, long term, remember our favourite inflation expectations will come in. You should have said, that will lead to inflation expectations. That is what Milton Friedman discovered.

Early morning, February 2 — the long run

Tantri. In the short term may be a bit. But long run no. Keynesian logic does not work in the medium to long term as prices are flexible. Cut in taxes is likely to increase labor supply and lead to higher production. G does not create multiplier in the long run as eventually prices catch up. However, increasing labor supply does.

In this case, long run may not be too long.

GDP is production and not consumption. The question is whether prices adjust. When prices adjust demand does not matter. When they don’t, demand matters.

Why will labor supply go up? Tax cut increases the opportunity cost of leisure. The same reason why some people are moving to Dubai these days. That is a net positive.

Keynesian economics is good for crisis. We cannot get vikisit bharat based on G.

As far as data are concerned, in the long run the multiplier of T is −2 to −3 and multiplier of G is less than 1. Thus, net net, this should add couple of crores to the GDP and not reduce it. And more importantly, couple of crores every year starting a year or two from now.

What to do in the short run

Tantri. Coming to what we have to do in the short term, the babus in the RBI should wake up and cut interest rates.

For the last year or so, I am trying my best to convince authorities on the need for both tax and interest rate cuts. I was hoping for 2 lakh crore tax cut but will take 1 lakh crore happily for now.

On the interest rate front, it is already too late.

Why this matters

Tantri. For those who have not understood much, but understand our ABCD example, D is not getting a job immediately due to this. Even C will continue to be unemployed for a while. The RBI can restore C’s job. But in the long run, D will work as her post-tax wages will go up. So GDP will go up.

On policy work

Tantri. I am fighting this battle. But have limited reach. The problem is many policy makers do not understand the very same frameworks they are using. In that, it becomes difficult to engage in a conversation.

It took one hour to convince one big name policy maker that real rate = nominal rate − expected inflation, and not nominal rate − current inflation.

Then they have big egos. I have almost decided to give up convincing. Instead write a book may be.

However this tax and expenditure cut has given me some hope. Got a call from MoF saying they did take into account my rants.

Editor’s notes

This thread is lifted verbatim from the Finance Enthusiasts WhatsApp group, late on February 1 and through the early morning of February 2, 2025. Light contextual prose has been added between Tantri’s messages; his words are unchanged apart from minor typo cleanup (MpC → MPC, GdP → GDP). Student questions have been paraphrased and anonymised.

Want the long-form version of the same argument? See the Union Budget 2025–26 session note, written up from the alumni session he gave on February 7.