Budget 2020: Six easy steps to boost consumption, investment, and economy

Updated: Feb 01, 2020 5:52 PM

Union Budget 2020 India: Prime Minister Narendra Modi has announced the Vision of achieving the $5 trillion economy and the government is geared to identify action plans to achieve this goal.

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By R Kannan

Budget 2020-21: India has witnessed one of the slowest economic growth in the recent past. This is in the light of the government announcing many schemes including several stimulus measures in the recent past and programmes like Make In India, Startup India, Financial Inclusion and several others with a view to accelerate the economic growth. Despite introducing many such schemes, the growth of the economy started sliding down. Prime Minister Narendra Modi has announced the Vision of achieving the $5 trillion economy and the government is geared to identify action plans to achieve this goal. To arrest the falling economic growth, the government has introduced many stimulus measures at regular intervals. The measures introduced so far are yet to give the desired result.

The issue of economic growth is due to fall in consumption by individuals, investment by companies and now the reduced investment from the government. The tax collected by the government is also much lower than the budgeted estimates. The interest rates in the economy are also the lowest in the recent past. The consumption by Individuals was weak on account of reduced income growth, reduced income, loss of jobs, reduced competitiveness of SMEs and fear of regulatory action (those who have high income but fearing that spending will bring them under tax net).

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Compared to consumption growth in the range of 7% to 8.5% in the previous half years, the consumption growth in this year was only 4.1%. Even those who are having high savings are postponing their purchase decisions and want to wait watch. The consumption value was also reduced by sharp fall in price of many of the products due to increased sales through e commerce channel and hyper competition in several industries. This has reduced the margin of companies and in several cases resulting in loss. Further , the tax collection potential was reduced and growth in GDP was affected due volume decline and price deflation in many product categories.

The government has taken as many fiscal measures as possible in the last few months. To boost the consumption, the budget could consider the following measures. Once the Consumer demand is revived, the factories will work to full capacity and they will start investing.

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1. Personal Income Tax rate . They can change the slab rates for income tax. The income slab for zero tax could be increased from Rs.2.5 Lakh to Rs. 3 Lakh. For 5% . they could increase the tax rate from Rs.2.5 lakh – Rs. 5 Lakh to Rs.3 lakh – Rs. 6 Lakh. For 20% tax, the slab could be increased from Rs.5 lakh – Rs. 10 Lakh to Rs.6 lakh – Rs. 12 Lakh. Above Rs. 12 Lakh, 30% tax could be applied.

2. Now investment in Pension funds of Rs.50,000 is exempt. This could be increased to Rs.100,000.

3. The investments under 80C of income tax were at the same level of Rs.150,000 for more than five years now and this could be increased to Rs.250,000. Since most of the investments under this category go to support the long term investments, increasing this limit will make the funds available for long term projects.

4. The elderly and retired make their investments mainly in bank Fixed Deposits. The lowering of interest rates in the economy has reduced the interest on Fixed deposits. This has reduced the income for those who have deposits in the banks. At present, Rs.10,000 in the bank interest from Savings account is exempt from taxation. This limit could be increased to Rs. 25,000 per annum. In the limit, they could include Fixed deposits also.

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5. Education Fee. Now one of the major expenses incurred by taxpayers from all categories is education expense for their children. Now these expenses are covered under 80C. Today, the average expense of a child will be anywhere in the range of Rs.7500. For two children, it will be Rs.15,000 a year. A specific section could be added for Education fee and the limit could be Rs.15,000 per annum, Rs.7500 a child.

6. There is a scheme under which, elderly can deposit in tax free Fixed deposits in banks. The limit for this deposit has been fixed at Rs.100,000. This could be increased to Rs. 250,000.

One of the reasons why personal consumption is low is due to fear of being tracked by the tax authorities and even those who want to buy products, they are not buying. Most of the demand for the Economy was coming from the Informal sector and from the parallel economy. Even those who were not paying taxes were buying expensive products including Automobiles and Houses. This source of demand has dried up. One of the radical ideas, the government could consider include , for the next two years, not to introduce new features for filing of tax returns and announcing the exemption from adhering to KYC norms for buying houses, automobiles, insurance products and others. This will go a big way in stimulating the demand in the Economy, thereby increasing the overall tax income and accelerating the GDP from the Present levels.

R Kannan is Head – Corporate Performance Monitoring & Research, Hinduja Group

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