Spend. It helps the economy, stupid!

One of the surest ways to revive the economy is to prompt households to spend. The best way to do this is through tax breaks, Gaurav Choudhury reports.

If 2012 will be remembered for slumping growth, a high cost of living, poor salary hikes and shooting EMIs, 2013 may well define the story of the Indian economy’s great come-from-behind innings.

HT Image

So, as lilacs bloom outside North Block, expect some peppy numbers on the FM’s station in the coming budget.

One of the surest ways to revive a sagging economy is to prompt households to spend on essentials as well as aspirational purchases. In the time of high prices, the best way to do this is by raising disposable income through tax breaks.

Experts expect finance minister P Chidambaram to iron out the teething problems in two of India’s biggest reforms initiatives — the Direct Taxes Code (DTC) to overhaul India’s archaic income tax laws, and the goods and services tax (GST) that will replace a welter of indirect levies with a single indirect tax.

Economists also expect prices to moderate in 2013. “The silver lining is that while India’s growth-inflation performance has clearly deteriorated in recent years, potential GDP growth has probably not, so far at least, slipped much below 7%,” said Richard Iley, chief Asia economist, BNP Paribas.

If that happens, EMIs will finally start a downhill march.

Cheaper cost of capital, coupled with a budget-induced demand push, will prompt companies to invest more in creating additional capacity. This would mean healthier sales, stronger profits, more jobs and better salary hikes.

“Demand prospects appear strong as both new orders and exports picked up in November, suggesting that activity levels will remain strong in the coming months,” said Sonal Varma of Nomura, a financial services group.