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Nothing works better than tax incentives to boost consumer demand

The economy does not move in a linear fashion, but is instead swamped with its share of ups and downs. Post the 2008 and 2013 meltdown, we are witnessing another cyclical slowdown in India.

September 17, 2019 / 11:11 AM IST
Representative image

Representative image

Sushant Bhansali

The economy does not move in a linear fashion but instead has its share of ups and downs. After the 2008 and 2013 meltdown, we are seeing another cyclical slowdown in India.

What is different this time is that it has coincided with two other important events. First, there has been a paradigm shift in the way business is conducted in India, and there is an immense focus on formalising the economy with reforms like the goods and services tax (GST), demonetisation and increased compliance.

Second, there is the debacle of IL&FS and DHFL, which triggered a liquidity crisis. Both these events have unfortunately coincided with the cyclical slowdown and aggravated the situation.

Pumping up consumer sentiment?

The government can revive the real estate sector with more focused reforms. Currently, an individual can claim tax deductions on interest payments on a housing loan, up to a maximum of Rs 2 lakh per annum. A short-term initiative, where this limit can be increased to say Rs 20 lakh uniformly across all tax brackets can give a major boost to the sector.

Real estate and housing, which have a strong link with other sectors, will have a positive ripple effect on the economy at large. This will not only help avert the solvency issues of real estate players but also resolve the liquidity crisis of major financiers and thereby, bringing back the trust in the financial system.

The auto sector is a major contributor to job creation. A short-term policy, where an individual can claim tax deductions on interest payments on a motor loan, say with a limit of Rs 1 lakh per annum, can boost falling sales.

Similar measures can be offered to make leave travel allowance (LTA) more attractive. Granting LTA for hotel stay along with airfare, reducing the time frame to claim the allowance or increasing the amount that can be claimed will not only revive tourism but will also drive consumer spending.

All these measures will be more or less cash flow neutral, as volumes will start picking up in real estate and auto, making good the losses on direct tax revenues. Overall, it will expand the base and increase the collection gradually.

Another area of concern is the lacklustre private capex. The government can bring in temporary initiatives such as accelerated depreciation or other specific one-time tax benefits for corporates to make capital expenditure a more attractive proposition.

The most important low-hanging fruit is to fix high-interest rates and the liquidity problem.

The cost of debt is hovering around 8-14 percent for most corporates, while inflation is around 3-4 percent. Most government-related instruments such as NSC, small-saving deposits, KVP, are yielding 7.5-8 percent annum.

Hence, it becomes a challenge for banks to cut deposit rates, as money will flow towards these instruments. One possible idea is to link these instruments and bank deposit rates to inflation.

These will lead to a cut in deposit rates and simultaneously lead to the effective transmission of lending rates. We have already seen the Reserve Bank of India cut interest rates by 110 bps so far, which has created enough liquidity by OMO purchases of more than 3.5 lakh crore in the last year alone.

Credit creation at low-interest rates in the right segment will help in faster recovery. Given the benign inflation environment, we believe RBI will have enough room to see another 50 to 75 bps rate cut, which will be beneficial to kick start the economy, provided a large part of it is transmitted effectively.

We also believe that along with an accommodative monetary policy, it is time the government kept fiscal worries aside and got into a spending spree with a more focused fiscal stimulus.

The government has to start spending on infrastructure and construction, which will help create jobs and revive growth.

This is an opportune time to implement structural reforms, related to factors of production (land and labour, to name a few), investment-related reforms in manufacturing and infrastructure, ease of doing business, increase in private sector involvement and divestment on a war-footing level.

(The author is CEO, Ambit Asset Management)

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Moneycontrol Contributor
Moneycontrol Contributor
first published: Sep 17, 2019 11:11 am