Decline in household savings: –
The sluggishness of the economy cannot be overcome only by a reduction in the policy rate, as the domestic financial savings rate in India declined sharply after 2010, which continued even after 2012. Household debt in the US was US $ 12.5 trillion in the first quarter of FY 2008, which increased to US $ 13.9 trillion in the second quarter of FY 2019. India’s total domestic financial liabilities stood at Rs.7.4 lakh crore in FY 2018, up 58 percent from FY 2017. In fact, household liabilities have increased 2-fold in the last 5 years, while expendable income has increased only 1.5-fold, putting increased pressure on savings.
Re-Imposition of Capital Gains Tax: –
In the Union Budget 2018, the government proposes to re-levy the long-term capital gains tax (LTCG), after a gap of 14 years. This tax is proposed to be levied on the transfer of listed equity shares above Rs.1 lakh and at the rate of 10 per cent. This tax is likely to affect the savings of common people in the form of shares and adventures.
Measures to reduce expenditure: –
A) Elimination of capital gains tax: –
The abolition of capital gains tax would boost domestic financial savings and encourage the public to invest more in financial assets than physical assets. Financial assets have grown at a faster pace than last year, a large part of which is equity.
B) Increase in Section 80C and PPF limit: –
Domestic savings were positively affected when the government raised the investment limit in PPF from Rs.50,000 to Rs.1,50,000 in August 2014. During FY 2015 as compared to FY 2014, the provident fund and pension fund had increased by only Rs.13,000 crore, but it increased by more than Rs.1 lakh crore in FY 2016 as compared to FY 2015. It is believed that if the PPF investment limit is increased by Rs.50,000, there will be an additional saving of more than Rs.1 lakh crore in domestic savings, but the loss will be only Rs.10,000 crore of revenue. Domestic savings are used to reduce the fiscal deficit, which increases liabilities on domestic savings substantially, but this cannot be considered to be completely true, as the domestic savings over a period of 2 years ending FY 2017, Lending has increased by only Rs.60,000 crore, while during the same period, raising the limit of Section 80C has increased household savings by Rs.1.8 lakh crore.
Increase in consumption through fiscal measures: –
The Reserve Bank is moving forward on the policy rate cut. It may cut policy rates in the coming months as well, but this is not increasing the final consumption expenditure. An important reason for increasing problem is the reduction in consumption expenditure by Rs.1.5 lakh crore. However, the government can increase the final consumption expenditure through PM-Kisan Yojana and MNREGA. The PM-Kisan portal shows that the number of beneficiaries is 14.6 crore, but the number of beneficiaries to be benefited is only 6.89 crore.
To increase rural demand, it is necessary to increase the number of beneficiaries of PM-Kisan. Data shows that till September, 2019, the central government has released Rs.45,903 crore under MGNREGA, but the expenditure has been 73 percent, which is Rs.33,420 crore in the amount. Significantly, any effort to cut spending just to maintain the fiscal balance can be harmful for development. Therefore, as another option, the process of increasing capital expenditure needs to be continued. In the Union Budget, a provision of Rs.3,38,085 crore has been made for capital expenditure, but till July, 2019, only 31.8 percent of this amount has been spent, which was 37.1 percent last year.
Need to increase final consumption expenditure: –
Spending should be done in such a way that demand is increased. The government and the general public should avoid spending for unproductive purposes. The real estate sector also needs to be classified under infrastructure. In this context, it may be beneficial to pay special attention to sectors like steel, cement, capital goods and fertilizer. A comprehensive incentive program can also be beneficial for housing buyers.
Corporate tax relief: –
The government has reduced the corporate tax from 25% to 22% as part of measures to boost growth and investment. This exemption will be given on the condition that they will not take any other exemption. The effective tax rate for these companies will be 25.17% including surcharge and cess. In addition, the minimum alternative tax rate has been reduced to 15% from the current 18.5% to provide relief to companies that have been taking advantage of rebates or incentives. The effective tax rate will be 17.01% including surcharge and cess. India has now come down to the lowest level of corporate tax among developing and emerging economies after the latest exemption. Brazil, South Africa and China now have higher corporate tax rates than India. This reduction in corporate tax could lead to competition with other countries, especially Vietnam in terms of exempting big businessmen. It is worth noting that in Vietnam, big businessmen or companies are given many incentives and discounts, due to which companies are eager to do business there. With the government giving corporate tax rebates and incentives, big businesses or companies can start new businesses or expand their existing businesses.
Impact of Corporate Tax on Selected Areas:–
The average effective tax rate of 3446 listed companies has been 32.40% in FY 2019. With a new effective rate of 25.17%, these companies will save 7.23% tax. The overall impact of the corporate tax rate reduction will save these companies about Rs.44,000 crore in tax. This exemption is a boon for corporates who are currently undergoing financial crisis. Businesses in the steel, finance, textile etc. sectors will benefit from the relief given by the government.
Other measures: –
By solving more and more cases under the Indian Insolvency and Bankruptcy Code (IBC), the capital problem of banks can be overcome. Foreign Institutional Investors (FPIs) should be allowed to directly acquire stressed assets without interference with Asset Reconstruction Companies (ARCs). In addition, investors should be allowed to acquire stressed companies which come under the purview of IBC through qualified foreign commercial loans (ECBs).
This can be done in association with the Reserve Bank. Bankers’ salary agreement is pending since 2017, which should be decided immediately. This will boost the morale of the bank workers, which will have a positive impact on their performance. It is also necessary to identify alternative sources of funds for the development of infrastructure. With the establishment of a development financial institution, the problem of capital can be solved. The creation of unique enterprise IDs can also benefit. ID will have a horoscope of the beneficiaries, which will help in sanctioning loans to MSME sector and its faster disbursement.
Implementing corporate tax relief and other measures will increase demand and consumption of various products. Due to lower tax and other measures, companies can reduce the price of various products. Due to lower prices of goods, their demand may increase. To raise capital, companies can pay more dividend to investors, which will increase the purchasing power of the investor. With increasing income, they will also be able to buy various products. If the companies give the benefit of discounts and incentives given by the government to the consumers, then the price of miscellaneous products can decrease by 2% to 5%.
By Suneel Kumar Pandey
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of AFTERNOON VOICE and AFTERNOON VOICE does not assume any responsibility or liability for the same.