Two key economic statistics, which were released this month, will matter a lot in the ongoing pre-budget discussions. The economy is expected to grow at 5% in 2019-20. This is the lowest since 2008-09. Nominal growth, which is what determines tax collections, will be just 7.5%. The previous budget had assumed a 12% nominal GDP growth. Inflation, on the other hand, reached 7.35% in December, the highest since July 2014.
Dealing with a low growth and a high-inflation economy requires a different policy orientation than the usual concerns around fiscal prudence and widening welfare benefits, which have characterised previous budgets of the government. With an almost 40% shortfall in nominal growth rate and a mid-year cut in corporate tax rates, which the government had admitted would lead to a revenue loss of ~1.5 lakh crore, anything other than a revenue shortfall will be a miracle. If the government cuts down on spending to keep the fiscal deficit in check, it will only backfire as GDP growth will come down even more. The bottom line is that everyone expects a fiscal slippage this time. The government has delivered on targets of asset building and service provisions such as housing for poor, toilets, LPG connections and electricity connections for all households. They are important milestones, but these gains are not a replacement for employment. The latter is crucially dependent on economic growth. The next budget ought to put its sole focus on reviving growth in the economy. This time, complacency about the government’s welfare achievements will be counterproductive.
After a cut in corporate tax rates, there has been a lot of buzz about a cut in income tax rates. Doing this will increase disposable incomes and boost private demand. If the income tax rate cuts involve a rolling back of various exemptions, as was done with corporate taxes, it will lead to a reduction in the corpus of small savings fund, which are normally at the government’s disposal. This increases the importance of a big policy reform, which the budget should target. India needs synergy in its efforts to seek long-term finance to sustainably fund investments and provide attractive returns to households outside what continues to be an overvalued stock market.
{{/usCountry}}After a cut in corporate tax rates, there has been a lot of buzz about a cut in income tax rates. Doing this will increase disposable incomes and boost private demand. If the income tax rate cuts involve a rolling back of various exemptions, as was done with corporate taxes, it will lead to a reduction in the corpus of small savings fund, which are normally at the government’s disposal. This increases the importance of a big policy reform, which the budget should target. India needs synergy in its efforts to seek long-term finance to sustainably fund investments and provide attractive returns to households outside what continues to be an overvalued stock market.
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