Budget 2020-21: This time Budget is assuming greater importance as GDP growth has collapsed from over 8 per cent to 4.5 per cent for second quarter of FY2020.
- Mohit Batra
Budget 2020 India: It’s time for making a wish list for the budget as we are less than 15 days away from the event. This time Budget is assuming greater importance as GDP growth has collapsed from over 8 per cent to 4.5 per cent for second quarter of FY2020. While slowing economy is one problem to tackle, falling revenue is another concern that would limit how much government can offer stimulus to revive economy.
We believe there are a few factors government should focus on in the coming budget — revival of consumption cycle, focus on exports & tourism and boost to capital market.
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In India, consumption accounts for substantial part of the GDP. As per data released by CSO, Private Final Consumption Expenditure accounts for 57 per cent of the GDP. Events like demonetization and patchy implementation of GST disturbed consumption cycle. Events like ILFS and global slowdown also played role. But one factor that many missed was change in the governments in various states. In last few years we saw change in state governments-be it Uttar Pradesh, Madhya Pradesh, Rajasthan, Punjab, Karnataka and now Maharashtra. Many state elections were won on the promise of farm loan waivers. As per one estimate these states announced farm loan waivers close to Rs 2 lac crore.
Balance sheet of many states are stretched as debt to GDP ratio of many states increased in last few years. The money that would have been spent on development project is being diverted to meet farm loan waiver. Today, states spending is new growth engine as they spend 65 per cent of total government spending. This is another factor pulling down growth rate.
Government needs to address this consumer slowdown monster on urgent basis. Consumption is driven by two factors- first is job stability where consumer is sure of its future income and second growth in income. Unfortunately, both have been impacted severely. The government can address by giving more money in the hands of consumers. One of the ways it can do is by cutting direct taxes on the same line it did for corporate tax. 90 per cent of tax payer have income less than Rs 10 lacs. We propose that there would be basic exemption upto Rs 5 lacs
and income between Rs 5-10 lacs attract only 10 per cent slab rate. This would put about Rs 60000 crore money in the hands of tax payers that can go for consumption. Revival of consumption cycle can lead to capex cycle.
No country in the world grew at faster pace by only focusing on the domestic market. Be it Japan, Korea or China. We need to make exports competitive. In 1990s, Indian IT industry did extremely well as government offered them tax incentives. Even Pharma did well. We feel that there are two sectors-electronics goods and chemicals-where government can give tax benefits as well as import duty concessions which can make the exports competitive. As per one’s estimate, India’s chemical exports can increase to $1 trillion in next five years.
India receives about 10 million tourist every year against which Vietnam, much smaller sized country, receive 15 million. China receives 14 times more than us. This calls for complete overhaul of tourism policy. The government can promote tourism by allowing corporate to build world class infrastructure at tourist spots. The amount spent on constructing, infra can claim either tax rebate in the first year of spend or income generated can attract concessional rate of tax at 10 per cent. Tourism can solve two problems at one go-precious forex earnings and huge employment
opportunities for local.
Capital Market reforms
NDA government in last five years constantly increased taxes on equity-be it Dividend distribution tax or levy of long-term capital gains on equity. These measures impacted fund raising on the bourses. The Government must remove DDT and let dividend be taxable in the hands of taxpayers. At the same time either government should remove tax on long term capital gain or allow cost of indexation to compute capital gains on the same line other capital assets are allowed.
The question that would arise is, if government allows tax sops, how will it meet fiscal deficits? We are of the opinion that government can relax its fiscal deficit target as situation on the ground calls for stimulus. Right now reviving economy is more important than meeting fiscal deficit target. India has managed with higher fiscal deficits in the past but not with poor consumption demand. Need of the hour is to revive economy and the budget should address the same on priority basis.
- Mohit Batra is CEO and co-founder, MarketsMojo.com.