By Srikanth Subramanian
In her recent announcement, the Finance Minister stressed the importance of the middle class, calling this section a crucial piece of the puzzle to boost India’s speed of development and prosperity. Beaten by high inflation and interest rates in the last year, the middle class has high expectations from the Budget. The government will have to walk a tightrope to balance middle-class expectations and macro events. Hence, “Will she or won’t she?” has been a buzzing question concerning taxes, disposable income and cost of living as we look towards the upcoming Union Budget.
Currently, around 5% of India’s 140 crore population pays direct income taxes, a majority paid by the middle class. Therefore all eyes and ears will be on the Finance Minister as to what she has stored for the middle class. Meanwhile, the five key reasons the government will have to consider before announcing the final budget ahead of the 2024 elections are:
- Expected lower tax revenue growth (9% in FY24E after 17% in FY23E), given lower GDP growth (nominal GDP growth of 9-10% in FY2024E versus 15-16% in FY2023E).
- Committed expenditure remains high, considering this is a pre-election Budget.
- Inflationary pressure in the system is expected to remain high, which will have a bearing on the disposable income of the middle class.
- Government borrowing is expected to remain much higher than pre-Covid levels (Centre’s gross borrowing from almost Rs. 6 trillion in FY2019 is expected to be Rs. 14.3 trillion in FY2023E and Rs. 15 trillion in FY2024E).
- The government’s continuous focus towards fiscal consolidation as it pursues a fiscal deficit target of 4.5% by 2025-26 and attempts to conform to the FRBM Act.
Even against this backdrop, expectations are the Budget could make matters easier for the middle class.
Addressing the concern of home loan buyers: As on August 2022, India’s home loan market was pegged at Rs. 24 lakh crore, expecting it to double in the next five years. India and other major global economies increased interest rate hikes to tame inflation, leading to higher EMIs. An adverse event in global markets could mean further increasing rates, lowering disposable income further. A higher deduction limit of, say, Rs. 5 lakhs as compared to the current Rs. 2 lakhs limit for home loan interest payments will take some sting off the retail investor’s soaring EMIs. It will also incentivise new home buyers to make the purchase. Additionally, enhancing the interest deduction limit under the Affordable Housing Scheme might encourage more people to buy homes while placing more money in their wallets.
Increase spending power of the middle class: The Finance Minister has to target a lower cost of living for the middle class. For example, a Petrol and Diesel excise cut can help bring down prices of goods from vegetables to electronics due to lower transport and logistics costs. As disposable income increases, the tendency to spend and invest also increases. Currently, at an all-time high, more income could add momentum to SIPs, leading to an overall higher investment by retail investors.
Capital gains and investments: The current tax structures for capital gains encompassing different asset classes are complicated by tenure, rate and domicile. Streamlining can enable efficient implementation and ease the compliance burden on the average investor. It will also encourage more participation in capital markets.
Basic exemptions: As inflation continues to remain high, there is a strong case to be made for raising exemption limits. The standard deduction of Rs. 50,000 for salaried individuals could be increased by another Rs. 50,000. The deduction limits under Section 80C can move up as well. Healthcare costs have also zoomed up in the last couple of years. The middle class would welcome an increase in the upper limit in section 80D.
The expectation is that the budget will leave more savings in the hands of the middle class, which will focus on improving the spending ability through multiple initiatives, which may lead to more consumption-driven growth in the economy and attract more investors into capital markets.
(The author is the CEO of Kotak Cherry. The views and opinion expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak group.)