Budget 'feel good' can see cut in the tax rate, sops for social sectors

NEW DELHI: A reduction in personal income tax, sops for the rural and agricultural sectors, as well as an aggressive boost to infrastructure spending are probably part of the second Budget, feeling good about Finance Minister Nirmala Sitharaman.

Faced with the worst economic slowdown in more than a decade, Sitharaman is expected to do everything possible to stimulate consumer demand and investment, government sources and economists said.

The second Sitharaman Budget, which will be presented on February 1, is expected to announce measures to restore economic growth and establish a clear roadmap to achieve the ambitious goal of a $ 5 billion economy by 2025.

Investments did not recover despite corporate tax cuts and other stimulus measures, higher FDI inflows, plans to consolidate state banks and monetary relaxation.

After corporate tax cuts in September last year, speculation abounds about the possible reduction of personal income taxes. A combination of an increase in the basic exemption limit and/or the introduction of a differentiated tax rate structure for higher income may be on the cards.

To cushion the impact on collections, these adjustments may be accompanied by a rationalization of tax refunds.

The government announced a series of stimulus measures in the last four months, but consumer confidence is lacking. Not many are anxious to get loans to buy houses or cars for fear of the worst. The factor of feeling good in the economy is missing, a senior source government said.

I think the Budget will be a budget to feel good that it will try to restore faith in the economy and stimulate spending and investments, the source said.

Because disbursements under the PM-Kisan scheme for farmers are less than the budgeted amount, the Budget can also see measures to get states to incorporate the most eligible farmers under the scheme.

In addition, there would be advertisements for sectors such as renewable energy, electronic vehicles, energy, affordable housing, real estate and exports, they said.

Financial markets expect relief in the Securities Transaction Tax (STT), the Long-Term Capital Gains Tax (LTCG) and the elimination of dividend tax.

Infusion of capital into public sector banks and liquidity measures for non-bank financial companies (NBFCs) may also be on the horizon.

Both government sources and economists felt that the Budget would reaffirm the focus on infrastructure spending after the launch of an ambitious National Infra Pipeline (NIP) in December.

Social sector schemes such as rural electrification, MGNREGA, medical care, education and training can also be mentioned in the Budget.

However, all these measures would have a cost of fiscal slippage.

The Economic Survey for 2019-20, published on Friday, has already laid the groundwork by suggesting that the government focus on reviving growth and leaving fiscal discipline a bit.

The RBI, armed with a favorable inflation context, defended the risks of deceleration last year with a reduction of 110 basis points in interest rates. As the relaxation cycle slows down, due to a non-seasonal increase in food prices that leads to inflation above the target, the ball is in government court to revive growth.

Sitharaman would have to strike a balance between efforts to boost growth and the need for fiscal restraint. Economists expect a slight political inclination towards the prioritization of growth.

It is estimated that real GDP growth will fall to a minimum of 11 years from 5 percent in fiscal year 20 from 6.1 percent in fiscal year 19. The estimated nominal growth at 7.5 percent in fiscal year 20 is the most low since 1975-76 (fiscal year 76) according to the GDP series based on fiscal year 2012.

The growth of PII became positive, but remained low at 1.8 percent in November 2019 after contracting at (-) 4 percent in October 2019.

CPI inflation rose to a maximum of 65 months from 7.4 percent in December 2019, its fifth sequential increase, mainly due to the persistent increase in vegetable prices.

In addition, bank credit growth fell to a minimum of 25 months from 8% in November 2019.