Tax cuts, higher farm outlays may not be enough to boost consumption

| Updated on January 28, 2020 Published on January 28, 2020

A more durable lift can come from a long-term approach that combines direct and indirect measures

With falling tax revenue and a likely fiscal deficit overshoot in FY20, the upcoming Union Budget has limited room to pull out the big guns to stimulate the economy. But if the economy is going to take centre-stage, it makes sense to focus on the consumption leg of it. Private consumption has always been the key engine of India’s growth story, accounting for 57 per cent of the GDP, and its growth has collapsed from 8 per cent in FY19 to 5.7 per cent in FY20. A demand revival is also necessary for the private sector to resume investments. Consumer sectors have lobbied for GST and personal tax cuts in the upcoming Budget, but a more long-term approach that combines direct and indirect measures may deliver better results.

Expectations are running high for the Budget to lift the basic exemption slab for income tax from ₹2.5 lakh to ₹5 lakh, and to slash tax rates across the board. Aside from the fact that consumers may not immediately spend their tax savings, such moves have other downsides. Taxpayers in the ₹2.5-5 lakh bracket today account for 47 per cent of India’s 5.87 crore taxpayers. Therefore, lifting the tax threshold to ₹5 lakh can substantially shrink the direct tax base. Instead of piecemeal tinkering, a more durable lift to spending can come from the Centre initiating a thorough overhaul and simplification of its personal tax system. It must initiate action on the Direct Tax Code report submitted by the Akhilesh Ranjan taskforce in August, which is said to have mooted many watershed reforms — from rationalisation of slabs and changes in the residential basis for income tax, to rooting out all surcharges and cesses. Dwindling rural demand has played a big role in the consumption slump. Here, the Centre needs to dispassionately assess why its galloping outlays on myriad rural schemes — from the FCI subsidy, to the Fasal Bima Yojana to PM-Kisan — have failed to yield any material gains. Fortunately, rising food prices in recent months offer hope for a turnaround in the agricultural terms of trade. Here, it is imperative for the Centre to announce and stick to a stable policy on farm import/exports, instead of jeopardising the trend through knee-jerk interventions. Non-farm employment opportunities hold the key to an all-round rural revival, and this requires addressing deteriorating MNREGA outlays and outcomes.

On urban consumption, removing bottlenecks to bank and NBFC credit flow can yield immediate gains, but a durable uptick depends on a revival in white-collar income and job prospects. For over two decades now, India’s urban employment prospects have hinged heavily on a one-trick pony — IT/BPO outsourcing. But with this sector moving away from headcount-led expansion, there’s an urgent need to discover and roll out focussed incentives for a clutch of new sectors that can take its place. Apart from traditional export-led manufacturing, new opportunities in financial services, hospitality and electronics manufacturing are worth exploring.

Published on January 28, 2020
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