The first budget after the coronavirus pandemic struck in March last year will be presented by the Finance Minister on 1st of February, 2021.
The pandemic has led to a contraction in the country's GDP, RBI expects GDP to de-grow by 7.5% for the Financial Year (FY) 2020-21.
All budget estimates for FY 20-21 have gone haywire and India’s fiscal deficit could be double of what was projected during the last exercise.
The finance minister has a tough task at hand. She has to find a balance between growth and fiscal discipline. Government receipts this year have dried up due to decline in economic activity, while expenditure is at budgeted levels to foster growth.
The government did announce a slew of measures to help the disadvantaged and impacted sections of the society including free ration and moratorium on loans.
However, it has been criticised for not giving out cash doles / putting money in the hands of people. As many people have lost jobs or their salaries / incomes slashed, this would help them meet their day to day needs and boost demand.
India unlike China is not an export oriented economy, it is consumption driven. Private final consumption expenditure (PFCE) which accounts for roughly 55% of India’s GDP has been under pressure in recent times.
The growth in PFCE declined to 5.3% in FY 19-20 from an average of 7% in the preceding 6 years. During H1 FY 20-21, it has turned negative due to the lockdown restrictions.
Even industry which received a tax boost during FY 19-20 now hinges on consumption led growth as investments have not picked up.
So how can the FM put more money in the hands of citizens so that it gives a boost to demand and sparks a multiplier effect on the economy.
1. Increase in standard deduction limit
The standard deduction limit could be doubled from existing Rs. 50,000 to Rs. 1 lakh for a year with review in FY 21-22. This would benefit salaried employees and professionals and could provide a stimulus of Rs. 6,000 crores.
2. Introduction of WFH deduction
A work from home deduction should be provided for individuals ranging from Rs. 10,000 to Rs. 25,000 per month to take care of the increased electricity, internet and food / beverages bills.
3. One time cut in personal taxes
A personal income tax cut needs to be seriously thought about. It could range anywhere between 25%-50%. This could release Rs. 1 lakh to 2 lakh crore in the hands of individuals and act as a demand stimulus. This amounts to a mere 0.7%-1.5% of India’s GDP.
An increase in consumption expenditure would boost sales / profits of corporates, kick in fersh investments and create new jobs. The multiplier effect could rake in additional Rs. 30,000-60,000 crores in form of GST, excise duty, corporation tax and compensate for the loss in revenues. So a one time loss in receipts would be only to the tune of Rs. 70,000-1,40,000 crores.
4. Tax credit vouchers to boost consumption
The government also needs to incentivize consumption. It shouldn’t happen that people start saving the benefit received due to lower tax outgo. It shouldn’t end up increasing the liquidity in the system.
People who spend money on domestic travel and vacations, people who consume things / services of street vendors and people who get done with their long pending treatments postponed due to lockdown should be provided with tax credit vouchers. This will help the ailing sectors hit hardest by the pandemic.
5. Stop EPFO contributions for a year
An option could be given to individuals to stop contributing their provident fund amounts for a year. This would increase the take home salaries and also reduce the expenditure of corporates who make equal contributions. This could benefit around 5 crore salaried persons.
6. No ceiling for interest and principal deductions on home loans
For individuals who buy a new house during this financial year the entire amount of interest and principal paid during the year should be allowed as a deduction from income. This will provide a fillip to the ailing real estate sector, clear up inventories and improve credit offtake of banks.
To sum up, extraordinary situations call for extraordinary solutions. To get back to our normal rate of growth of 8% and grow consistently at these levels the Finance Minister needs to take some bold and not just cosmetic steps.