Government is also likely to increase the interest exemption on housing loan from Rs 2 lakh to Rs 3 lakh.

Mumbai: With just over a week left for the presentation of union finance budget, State Bank of India (SBI), the country’s largest public sector lender in terms of assets said it expects the government to announce sweeping changes to the direct tax regime that will give a boost to consumption demand to overcome the negative impact of demonetisation.

The research desk at SBI said that it expects an increase in personal income tax exemption limit from Rs 2.5 lakh to Rs 3 lakh and increase in the maximum deductions under section 80C for the computation of total taxable income from the current ceiling of Rs 1.5 lakh to Rs 2 lakh per year.

Additionally, the government is also likely to increase the interest exemption on housing loan from Rs 2 lakh to Rs 3 lakh and reduce the lock in period for bank fixed deposits from 5 years to 3 years for availing tax exemption. “Such giveaways will cost Rs 35,300 crore, but we expect this to be more than balanced by the revenue from Income Declaration Scheme and cancelled note liabilities of RBI,” research analysts at SBI said.

Stating that note ban has changed the entire gamut of the economy, analysts at SBI feels that the government should not get straitjacketed in the fiscal consolidation agenda that could compromise India’s development goals.

“Textbook macro-economics suggest fiscal policy should ideally be countercyclical, that is, fiscal deficits should decline when the economy is expanding and increase during downturns. The Fiscal Responsibility and Budget Management (FRBM) does exactly the opposite. The FRBM rules are currently loaded against the best fiscal practices in other countries. This should be corrected,” it said.

Requesting the Centre to tweak the 3 per cent fiscal deficit target for FY18 in order to give more priority to growth over fiscal austerity, SBI said, “Most economies now target a structural deficit where actual deficit is allowed to exceed or fall below this target when growth is too low or too high,” it added.