Modi 2.0: Govt mulls steps to lift demand, to focus on lowering I-T rates

The government had then given over Rs 1 trillion stimulus to spur the economic growth
Faced with warning signs of an economic slowdown, the finance ministry has prepared a three-pronged strategy to boost consumption as well as bring down the cost of capital to ensure higher private investment. 

One of them is to lower income tax rates, enabling the middle and neo-middle classes to spend more, which will boost demand and consumption. Secondly, there will be a continued public sector investment push, which will act as a stimulus to private investment. The third is to lower the cost of borrowing, which will enable corporate to borrow more and spend it on investment. Some of these measures are expected to find their way into the full Budget 2019-20.

The government will have to do its fiscal math to provide this kind of boost if it wants to stick to the fiscal deficit target of 3.2 per cent of gross domestic product (GDP) for the current financial year. 

The last measure will be subject to the Reserve Bank of India’s Monetary Policy Committee’s move to reduce the policy rate in its June review. Senior government officials hope that inflation trends are benign enough to justify another round of rate cuts by the MPC to perk up economic growth, which is unlikely to go much higher than the anticipated 7 per cent in FY19.

“What we won’t do is have a 2009-10 kind of stimulus, by pumping in more money to boost growth. There is no fiscal space to do that. The Modi government will continue its fiscal consolidation path,” said an official aware of the plans.

The government had then given over Rs 1 trillion stimulus to spur the economic growth, which saw the ripple effects of the global financial meltdown. It had also cut excise duties and services tax, besides enhancing public expenditure. 

However, now excise duties and services tax have largely been subsumed into the goods and services tax (GST), where the Centre alone cannot take any decision. So, stimulus has to come from the income tax front. “There are deliberations on whether there can be lowering of income taxes and other sops to keep more money in the hands of taxpayers, enabling them to spend more and boost demand. Of course, any such measure will be announced in the Budget. We will present this proposal to the new finance minister,” said the official.

The interim Budget for FY20 has already announced tax credits because of which taxable income of up to Rs 5 lakh would not draw any tax. This means gross income of up to Rs 10 lakh depending on various savings done under tax deduction schemes.

“Meanwhile, the government and the state-owned companies’ capital expenditure push will continue. This will keep up the growth momentum. Third, if the RBI can reduce interest rates, that will push down cost of lending and allow corporates to spend more on infrastructure and capital expenditure,” the person said.

The BJP’s manifesto has promised to make capital investment of Rs 100 trillion in the infrastructure sector by 2024. However, this seems to be much of an ambitious task.

The total capital expenditure of the government is estimated at Rs 9.61 trillion for 2018-19 (revised estimates). This is projected to decline marginally to Rs 9.53 trillion in the Budget Estimates for 2019-20. 

The crucial issue would be how fiscal deficit will be affected if the government lowers income tax rates further.

D K Srivastava, chief policy advisor at EY India, said the government should consider widen fiscal deficit by 30 basis points of GDP to provide the push to the economy. He estimated that this would release around Rs 90,000 crore for such a measure.

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