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ET Explains: Six ways in which the Budget can turn the economy around

What can Sitharaman do to present a Big-Bang Budget? Here is a six-point solution.

ET Online|
Last Updated: Jan 24, 2020, 05.36 PM IST
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Sitharaman
Clarity on funding for the Rs 102 lakh crore National Infrastructure Pipeline announced by finance minister Nirmala Sitharaman will stimulate private investment.
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The upcoming Budget is being presented in the backdrop of a slowing economy and rising inflation. Concerns over India slipping into stagflation have taken centre stage. The first advance estimates put India's economic growth at 5 per cent for the current fiscal. Government has pinned hopes on the economy turning a corner in the second half after growth slipped to 4.5 per cent in the second quarter.

growth

Government responded promptly to the deteriorating growth numbers and cut the corporate tax along with other measures to bolster a flagging economy. Come February 1, all eyes will be on finance minister Nirmala Sitharaman, who will present her second Budget at a time when concerns over government meeting its fiscal deficit target have mounted as revenue collection has taken a hit.

What can Sitharaman do to present a Big-Bang Budget? Here is a six-point solution:

1. Forget fiscal consolidation for the time being
To start with the government can come clean on the fiscal deficit numbers by reporting the off-Budget numbers and redraw the glide path taking into consideration the present state of the economy. Many experts, including the former finance secretary S C Garg, have said that India's deficit is larger than what is reported. A report in this paper said that the government is planning to report the true extent of India's fiscal deficit by including the off-budget liabilities.

2. Cut personal income tax, give more to consumers
Another major intervention will be to go for a cut in personal income tax following up on the earlier announcement of reduction in corporate tax. While the latter will spur investment in the economy which has crashed to just one per cent growth in the current fiscal from ten per cent in the previous year, the former can boot the economy in the short term. The government can implement the Akhilesh Ranjan committee's report on the Direct Tax Code that has suggested a change in slabs.


Rates suggested by task force on DTC:

Annual Income Tax rate
Up to Rs 2.5 lakh Nil
Rs 2.5 lakh- 10 lakh 10%
Rs 10-20 lakh 20%
Rs 20 lakh-Rs 2 crore 30%
Above Rs 2 crore 35%
( With no surcharge or cess)

Existing tax slabs:
Up to Rs 2.5 lakh Nil
Rs 2.5-5 lakh 5%
Rs 5-10 lakh 20%
Above Rs 10 lakh 30%
Above Rs 50 lakh 30% + 10%-37% (surcharge)

3. Ease credit flow to boost demand
India's consumption economy took a hit post the NBFC crisis deepened. The government had announced a partial credit guarantee scheme for NBFCs in December. According to a report in this paper, the government could come up with a Troubled Assets Repurchase Programme (TARP)-like solution for India's beleaguered NBFC sector to provide more lending room to the shadow lenders.

4. Stick with the asset monetisation plan
The government is likely to complete the strategic sale of Air India, BPCL, Concor and Shipping Corporation in the next fiscal. That, along with a stake sale in Axis Bank and ITC held through SUUTI, can bolster the disinvestment programme for the next fiscal providing funds for increased investments on creating key capital assets.

5. Booster shot for Markets: Abolish LTCG and DDT
With a cut in corporate tax, calls for similar concessions on LTCG and Dividend Distribution Tax have become louder. If the government abolishes the LTCG and the DDT, it could come as a huge sentiment booster for the markets and put more money in the hands of the industry for investment. Another proposal is to tax the dividend income at the hands of the investor rather than the company.

6. Ramp up infra spending, rural allocations
The government can increase allocation on its schemes targeted at those living in rural areas. The government can increase allocation in MGNREGS and PM Kisan to lift rural demand. Clarity on funding for the Rs 102 lakh crore National Infrastructure Pipeline (NIP) announced by finance minister Nirmala Sitharaman will stimulate private investment. The government can raise the Rs 2 lakh cap on interest deduction for home loans to revive the construction sector.

With Bureau inputs

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