We should be prepared for some amount of fiscal slippage in the next financial year.
Never in recent memory has a Union Budget been so eagerly awaited as the one this year. For the past many years, the Budget had become a rudimentary exercise, bereft of any substantial measures. This year could be an exception.
India's GDP has been slowing for the last four quarters. There has been a general slowdown in consumption, too, which suggests that the GDP slowdown could be more endemic than it looks.
Two key sectors — real estate and auto — have been facing strong headwinds and their growth is in negative territory, though both contribute substantially to the GDP numbers.
The government and the Reserve Bank of India have taken a number of measures in the last six months to address the slowdown and to revive growth.
One of the biggest measures has been the corporate tax rate cut from 30% to 22%. The government’s decision to reduce to 15% the tax on new units should drive investment in manufacturing capacities, from both domestic and foreign players.
However, most of the measures are yet to lead to any visible improvement in the growth rate.
In view of this, the Budget this year will be one of the most critical ones in many years. Its objective will be to drive up consumption and investment spending. We expect the Budget to have large-scale measures on both the fronts.
To drive consumption, the government must put additional money in the hands of the middle and lower middle classes. The government should consider raising the exemption limit to Rs 3.5 lakh, which should lead to Rs 5,000 of savings for almost 3 crore taxpayers.
The government should also consider reducing the slab rate for Rs 5-10 lakh from 20 percent to 10 percent. It will release Rs 50,000 per person per annum, leading to almost immediate growth in consumption.
The economy and capital market sentiments are interlinked and thus, a good capital market provides much-required risk capital to the economy.
The long-term capital gains (LTCG) tax has been an eyesore for the capital markets for the last two years, without any substantial tax accruals for the government. Removing this small bump will help improve the investor sentiment and drive flows into the capital markets.
The super-rich tax spooked sentiment last year. Paying a 37 percent surcharge on a 30 percent tax defies logic and the additional revenues to the government have been relatively small.
Considering that the super-rich are also the people who provide maximum employment in the private sector, taxing them unreasonably is counterproductive. We hope that the government reconsiders the surcharge and brings it down.
To compensate for the loss in tax revenues from the above measures, the government may look at large-scale disinvestments of PSUs.
The Budget should also have measures to boost credit growth. The proposal of setting up a ‘bad’ bank that can absorb the NPAs of the public sector banks has been talked about for a long time. Such a measure will shore up capital adequacy of the PSU banks and allow them to lend freely. We expect the Budget to have a proposal along these lines.
There is an expectation that the Budget may also increase infrastructure spending as it has a major impact on driving GDP growth.
We should be prepared for some amount of fiscal slippage in the next financial year due to all these measures.
In the current scenario, boosting consumption and reviving GDP growth should be the top priority for the Budget. A larger economy that is also growing healthily will in any case lead to growth in both direct and indirect tax collections in the subsequent years.
(The author is Managing Director at Ladderup Wealth Management.)
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