The moderation in nominal income growth has affected the consumption spending of the middle class.
The Union Budget 2020-21, to be presented to Parliament by finance minister Nirmala Sitharaman on Saturday, February 1, comes at a time when the Indian economy is facing headwinds from a growth slowdown, on account of both domestic and global factors. A drop in private investments coupled with a slowdown in consumer sales resulted in subdued economic growth and weakened economic activity. Therefore, it is expected that this year’s Budget will include strong measures and enabling policies that would focus on reviving the growth of the Indian economy.
While the government announced a slew of measures to reinvigorate growth, particularly in the areas of taxation, banking and infrastructure, it is critical that the Budget strategically deploys measures that provide an impetus to reviving demand. The economy’s primary growth drivers, which are consumption, investment, government spending and exports, must be activated and given top priority for bolstering growth.
CII has suggested that the 2019-20 fiscal target may be relaxed by 0.5 per cent to 0.75 per cent, which will give the government additional fiscal space. Some flexibility in fiscal policy is recommended at this stage for providing fiscal stimulus. This may be used to step up the government’s capital expenditure, by fast-tracking the planned infrastructure projects. Once the economy is back on track, we may think of returning to fiscal consolidation.
It is also suggested that a move from a cash-based accounting to accrual-based accounting system may be facilitated as the former captures the financial position of an entity more comprehensively and would also usher in greater transparency and improve fiscal management in the system.
In terms of augmenting revenue, the year’s disinvestment targets must be met in a time-bound manner, while higher targets must be set for the next year. The process of monetising assets such as ports, roads, airports and government land must continue, with the proceeds used for building new infrastructure.
Further, expenditure rationalisation is suggested through subsidy reduction via measures such as Aadhaar enabled direct benefit transfer for food, fertilisers and kerosene subsidy, urea price decontrol and pruning the number of Centrally sponsored schemes to around 10-15 from around 28 umbrella schemes at present.
For revival of demand, CII has suggested rationalisation of personal income tax, measures to boost rural income and to support the real estate and housing sectors.
The moderation in nominal income growth has affected the consumption spending of the middle class. Rationalisation of personal income taxes will enhance their disposable income and thus stimulate spending. CII has recommended that the tax rate should be nil for incomes of up to `5 lakhs, 10 per cent for incomes of `5-10 lakhs, 20 per cent for incomes of `10-20 lakhs and 25 per cent beyond that.
While it may not be possible to remove the recently imposed higher surcharges on the super-rich for revenue reasons, the government may consider formulating a three-year roadmap for reducing the rates, along with the removal of all deductions and exemptions.
The real estate, housing and construction sectors play a vital role in employment, rural incomes and demand generation. Therefore, appropriate measures to boost these sectors is crucial for promoting sustainable growth.
Suggested measures include permitting usage of ECBs to fund land acquisition; granting of infrastructure status to integrated townships and overall housing sector to allow developers to access priority funding at lower cost; releasing additional land parcels through an effective and transparent mechanism to give a push to affordable housing in urban areas. An independent regulator may be announced for the roads sector to set standards and formulate tariffs and pricing related policies.
The Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) are an important source of financing for both consumers and businesses. The government could adopt several measures to enhance liquidity of these institutions, in consultation with the Reserve Bank.
These could include defining a framework for a “lender of last resort” to provide liquidity; creating a separate classification within the systematically important NBFCs based on asset book size and supporting them with additional funding options. Some of the end use norms for ECBs raised by HFCs need to be relaxed to facilitate credit flow.
To boost rural incomes, it is critical to promote labour intensive manufacturing and construction, as these industries provide employment to the unskilled workforce, largely in rural areas. Second, farmer incomes from agriculture and livestock activities can be increased by providing better access to markets, timely access to inputs and greater engagement of the private sector. Third, the Budget must make higher allocations for agri-infrastructure, particularly irrigation, as this is imperative for increasing productivity of the sector.
CII has suggested several measures to jumpstart investment in the economy. These include decriminalisation of business laws for improving trust between the government and business; measures to reduce the cost of equity capital; a roadmap for the convergence of all the tax rates at 15 per cent and the formation of an expert panel under CBDT to mediate disputes at the assessment stage in a time-bound manner.
Global trade is another major engine of growth. CII suggests integration with Global Value Chains (GVC) and attracting FDI by focusing on key GVC opportunities and announcing policies for attracting investments, both domestic and foreign investments in these.
The government should follow the principle of lowest customs duty for raw materials, higher for intermediaries and highest for finished goods. This graded duty structure for manufacturing sectors is useful to add value at different stages of production by the indigenous industry. Availability of essential inputs and raw materials at cheaper price shall keep the prices of final products at lower and competitive level. CII recommends that customs duty on certain inputs and raw materials should be reduced to enhance competitiveness and encourage the domestic manufacturers.
The peak rate of customs duty should continue at 10 per cent, to provide competitiveness to the indigenous industry which suffers from certain disadvantages like a higher rate of interest and power.
A forward-looking Budget with such strong measures focusing on stimulating demand in the economy would revive growth and take India towards a path of sustainability.