Business Today
Loading...
Good Things in Small Packages

Budget 2020 may be remembered for the new personal tax regime, thanks to a host of small initiatives, history may remember it as the Budget that restarted - however slowly - India's consumption and investment engines following the "deep slowdown"

Good Things in Small Packages

Business Today Editor Rajeev Dubey

There is a reason why Piyush Goyal's Interim Budget and Nirmala Sitharaman's Budget 2019 failed to kick-start India's growth engines - but Budget 2020 could.

Goyal's Interim Budget was tasked with winning the elections with sops to the poor and the farmers. It succeeded there but failed to revive the economy. Sitharaman's first Budget, the Economic Survey and subsequent announcements idealistically pointed at China's growth model and aimed at rekindling the "animal spirits" in the economy, cutting corporate taxes, consolidating banks, incentivising exports and real estate and injecting liquidity.

But the assumption in both the Budgets that India's slowdown was deepening due to failing investment cycle and lack of growth in exports was a woefully wrong diagnosis. India's exports have been flat since 2013, and private investments have been slowing for at least seven years. But the economy was still chugging along at 7-8 per cent. GDP's sharp deceleration in previous quarters (from over 8 per cent to 4.5 per cent) wasn't triggered by that. Instead, it was due to failing CONSUMPTION.

Ignoring the need to stoke demand in the economy proved to be a mistake as the nation wasted four-five quarters waiting for the turnaround.

But since then, having toured the length and breadth of the country as finance minister to meet with industries, SMEs and economists, Sitharaman acknowledges the consumption crisis and has finally got around to working on it. That's the most heartening aspect of Budget 2020.

Higher disposable income with individuals and higher investible surplus with companies were the two prerequisites to restart the consumption cycle. Within the constraints of a tax shortfall and rising fiscal deficit, Sitharaman appears to have worked at both ends.

The benefits of the new personal income tax regime being limited to income up to Rs 15 lakh per annum has a vital significance. New tax rates will not make sense for those availing all or most of the tax exemptions. But only 9 per cent of taxpayers avail all exemptions. The new scheme still makes sense for 91 per cent of those earning up to Rs 15 lakh per annum. Given that over 85 per cent of India's 5.5 crore taxpayers earn less than Rs 15 lakh, they may choose to switch to the new regime with higher disposable income. Extension of Rs 1.5 lakh exemption of interest payment on loan availed for affordable housing by another year and deferring tax on ESOPs by five years will all provide confidence to the middle class to spend.

Businesses can look forward to "Vivad Se Vishwas" - the new direct tax amnesty scheme, the only one of its kind to exempt both interest and penalty from tax dispute. If settlements could unlock even a fraction of the Rs 9.41 lakh crore stuck in 4.83 lakh direct tax disputes, it would release enormous money into the economy to invest in plants, new offices and in creating jobs.

The other big move of massive hikes in protectionist import tariffs in many sectors may be a regressive move that will raise cost of products for consumers but will strengthen balance sheets of companies impacted by cheaper imports. Something that could trigger their investment cycles and possibly jobs. Push for infrastructure spending (despite relatively small hikes in allocation) will likely keep the public expenditure engine going strong, if not stronger.

Even though Budget 2020 may be remembered for the new personal tax regime, thanks to a host of small initiatives, history may remember it as the Budget that restarted - however slowly - India's consumption and investment engines following the "deep slowdown".

Get latest news & live updates on the go on your phone with our News App. Download The Business Today news app on your device
More from Editor's Note