Budget 2020: What FM Must Do To Revive Economy? Options from Consumption to Capital Market Reforms

Budget 2020 India: Litmus test ahead for Finance Minister Nirmala Sitharaman as she will present an important Union Budget on 1 February. At a time when the GDP growth has collapsed from over 8 percent to 4.5 percent for second quarter of FY2020 and the unemployment is high, this year’s Budget is assuming greater significance. While a slowing economy is the principal problem to find out a visible solution, falling revenue is another concern area for the finance minister as everything depends on budgetary allocation and expenditure to revive economy.

Meanwhile, the expectations are high from India’s great middle class either in terms of a slash in personal income-tax rates or by substantially increasing government expenditure to provide a much needed fiscal stimulus. Following are the few grey areas which are to be looked into on priority basis by the FM.

Consumption

The Government needs to address this lack of demand by the consumers in the market on urgent basis for a spiraling effect to take off in the economy. The sooner is the better.
Consumption is driven by two factors one is employment and stability in the job by which the consumer will be sure of its future income and steady growth income.

Cut in Income Tax

Moreover, to drive consumption, the FM must put additional money in the hands of the middle and lower middle classes. Since, around 90 per cent of tax payers have income less than Rs 10 lacs, the finance minister can cut the direct taxes on the same line it did for corporate tax. 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.

Exports

Exports is the key sector to stimulate the growth rate. When there is low demand in the domestic market, exploration of new markets through exports is the best option left to revive the economy. For example in 1990s, Indian IT industry did extremely well as government offered them tax incentives. Even the Pharma sector did well. Tax benefits to export oriented sectors like electronics goods and chemicals, leather and garments as well as import duty concessions can make the exports competitive.

Tourism

According to rough estimation, India receives about 10 million tourists every year against which Vietnam, a much smaller sized country, receives 15 million. The tourism sector is still in virgin stage and it needs to be exploited to its fullest potential. The government can promote tourism by allowing corporates to build world class infrastructure at tourist spots. Other States as well as the Centre should learn something from Odisha where the Government is investing heavily to promote tourism through sports and building world class infrastructure to attract foreign tourists. The amount spent on constructing infrastructure can claim either tax rebate in the first year of spend or income generated can attract concessional rate of tax. Tourism can solve two problems – one it will generate foreign exchange and the other is it can create huge employment opportunities for local people.

Capital Market reforms

NDA government in last five years constantly increased taxes on long-term capital gains on equity and it has been an eyesore for the capital markets for the last couple years, without any substantial increase in tax collection for the government. FM may think of removing tax on long term capital gain which may help in improving the investor sentiment and drive flows into the capital markets.

As of now reviving economy is more important than meeting fiscal deficit target and the budget should address the same on priority basis.