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How the FM can boost consumption and growth with this Budget

Amitabh Tiwari
·Columnist
·4 min read
Finance Minister Nirmala Sitharaman: Photo: Getty Images
Finance Minister Nirmala Sitharaman: Photo: Getty Images

The first paperless budget is being prepared by the Union Finance Ministry in the times of COVID-19. There is a lot of buzz around the exercise as Nirmala Seetharaman has stated: "100 years of India wouldn't have seen a Budget being made post-pandemic like this.”

The Sensex has breached the 50,000 mark and economic indicators are hinting at a V-shaped recovery with GDP growth estimated to even exceed 10% in financial year 2021-22 on a low base.

One of the most important pillars of growth in India is consumption. Unlike China, which is export dependent, India is a consumption driven economy. Private final consumption expenditure (PFCE) which is an indicator of household spending accounts for roughly 55%-60% of our GDP.

PFCE had started to tire out even before the COVID-19 crisis hit. The lockdown in Q1 exacerbated the unemployment situation with many people facing job losses and pay cuts.

In the April-June quarter, when gross domestic product contracted by 23.9%, private consumption fell 26.7%. It improved in Q2 but remained in the negative territory at -11.3%.

You need more money in the hands of people to stimulate demand. However, given the decline in tax collections and overshooting on the fiscal front, the government doesn’t have much room to reduce income taxes or GST on certain products.

COVID-19 has also decimated livelihoods in urban India, creating a new underclass of workers who are being pushed into poverty, according to an analysis by the London School of Economics.

For such workers an urban version of NREGA could be implemented to provide them relief. This could be started in Tier 2 and Tier 3 cities as a pilot.

Employee provident fund contributions could be paused for a year for those who opt for it, which will lead to an increase in take home salary.

If the government cannot reduce taxes, it should not fall prey to demands to introduce a COVID cess. This will send a wrong signal to the market and depress consumer confidence.

The tax slabs we have currently are very narrow. There is a tax rebate of Rs 12,500 which effectively makes income up to Rs 5 lakh exempt from tax.

This means the first tax rate applicable is 20% which is very high for an income of Rs 5 to 10 lakh. We don’t have 10%, 15%, 25% slabs. A rationalisation of tax slabs is long due.

Income (Lakhs)

Rate

0 to 2.5

0%

2.5 to 5

5%

5 to 10

20%

>10

30%

The standard deduction limit should be doubled to Rs 1 lakh for this year taking into account higher expenditure incurred due to work from home.

The farmers have been protesting against the three Farm Bills for the past two months. Farmers have been battling lower prices and higher input costs. Government should mull doubling the PM Kisan Nidhi scheme from Rs 6,000 to Rs 12,000 for this financial year. This would provide a boost to rural demand.

The Finance Minister should continue with higher NREGA allocation as last year as the effects of COVID have not completely died down yet. However, it should not extend the free ration distribution which in turn should boost demand for staples in rural India.

The FM should declare the intent of the government to reduce GST on two wheelers from 28% to 18%. This will give the much needed fillip to the automobile industry.

A special deduction for interest on vehicle loans similar to home loans could also spur the demand for passenger vehicles.

The government should increase deduction limits for interest and principal payment on home loans. This could boost demand for house and aid in the revival of the struggling real estate sector.

Both the auto and the real estate sector employ millions of people and a push in demand could lead to job creation with a multiplier effect on other parts of the economy.

The Budget 2021 needs to restore millions of jobs lost due to COVID-19 to boost demand. The government could look at providing incentives to corporations which hire people during the year. A portion of the employer provident fund contribution (25%) can be subsidized by the government.

Low interest rates have hit the income of senior citizens. To provide relief, deduction limit for interest income on fixed deposits should be increased from the present Rs. 50,000 to Rs. 75,000 per annum.

A radical suggestion by R.K. Kannan is that the government should consider not to introduce new features for filing tax returns and announce exemptions from adhering to KYC norms for buying houses, automobiles, insurance products etc. for the next two years. This could stimulate the parallel economy and boost demand.

To sum up, the Finance Minister has a tough job at hand to stimulate demand without significant revenue leakages and fiscal slippages. Best wishes to her and the team!

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