To revive economic growth the 2020-21 Budget should focus on expenditure while compromising on fiscal ratios
Ever since the Modi Government came to power for the second term, it has implemented various strategies to overcome the fiscal deficit and keep inflation in check. The slowing economy needed Finance Minister Nirmala Sitharaman to resolve issues like the agrarian troughs, slump in the real estate, aviation and infrastructure sectors and the Public Sector Bank (PSB) crisis. The most ambitious promise of the NDA-led Government in their election manifesto of 2019 was to support the marginalised farmers by providing Rs 6,000 per year directly into their bank accounts under the Kisan Samman Nidhi scheme. To combat the issues related to real estate, Sitharaman announced building 19.5 million rural homes by 2022. A continued focus was maintained on connectivity development under the national highways and rural road programmes. To provide support to PSBs, Rs 70,000 crore was infused to improve their deteriorating lending capabilities. As per the announcement made by the FM, corporate taxes would be reduced and foreign direct investment (FDI) would be further opened in the aviation sector. However, even with strong Budget plans, the Gross Domestic Product (GDP) slipped to five per cent in the second quarter of 2019 from nearly eight per cent in 2018-19 which further slipped to 4.5 per cent in the third quarter of 2019. Deteriorating domestic consumption was a major reason for the slow growth rate as the private consumption rate declined from 11 per cent to a mere three per cent in the first half of 2019. The largest employer in the country, the automobile sector, also faced a severe setback due to the lack in consumption and overproduction. The Government decided to cut corporate taxes from 30 per cent to 22 per cent to fuel the economy and attract more investments.
Despite all these efforts, the economic slowdown is still continuing and the lack of liquidity is another area of concern. The fiscal deficit for the period April-October rose to 3.3 per cent of the GDP, which is a major pain point. Despite policy rate cuts, there has been no substantial credit growth. The high Government expenditure is a burden, which further increases the fiscal deficit. Another major roadblock is the ease of doing business in India. There should be structural reforms to deal with challenges such as land acquisition and labour, environmental and other regulatory clearances. With all these challenges looming large, Sitharaman’s Budget announcements on February 1 are keenly awaited and the masses are expecting some sops.
Tax relief to individual tax payers: In the previous year corporate tax rates were slashed to boost the economy. Likewise, individual tax payers are looking for a relief in tax rates. The exemption limit should be increased to Rs 3 lakh and to Rs 3.5 lakh for senior citizens respectively. This would mean more disposable income with each tax payer, which would help in boosting private consumption. Also, recommendation has been made by the committee constituted to draft new tax laws to introduce five tax brackets of five per cent,10 per cent, 20 per cent, 30 per cent and 35 per cent. The expectation from the Government is an increase of the exemption limit under Section 80C from Rs 1.5 lakh to Rs 3 lakh as it was last revised in 2014.
Higher interest deduction for housing loans: The FM should focus on increasing the deduction of interest on housing loan. It should also increase the limit of one self-occupied property to Rs 250,000 and two self-occupied properties to Rs 300,000.
Abrogation of LTCG: To cheer up the stock market, the Government should consider giving relief on Long Term Capital Gains tax. This would increase the liquidity in the market and directly increase consumption. An increase in private consumption would lead to healthier market condition thus in turn increasing the overall demand for goods.
Strategic disinvestment: The Government should achieve its disinvestments goals by March 31, so that it can overcome its revenue shortfall from tax collection. A distinctive strategy should be announced for disinvestments in Air India.
Increase in defence spending: There has been little to no change in the Defence Budget for a long time. A major focus should be incentives for defence sector MSMEs under the ‘Make in India’ programme.
Infrastructure development: As India currently has infrastructure projects worth Rs 102 lakh crore in the pipeline, which will rise to Rs 300 lakh crore eventually, there is a strong demand to provide a draft for Development Finance Institutions (DFIs) to address the funding crisis.
The predicament of the Government now would be whether to increase its expenditure or not. However, this spending is required for the economy to recover. The Government has set a fiscal deficit target of 3.3 per cent of the GDP. According to economists, which include the likes of Abhijit Banerjee, fiscal deficit should not be an area of concern when demand and investments are slowing down. To revive economic growth, the 2020-21 Budget should focus on more expenditure while compromising on the fiscal ratios. For now, we can count on the fact that this fiscal gap would help in the long run to pave the way for economic recovery of India.
(The writer is a PG scholar at the Great Lakes Institute of Management )
