The National Democratic Alliance government under Narendra Modi returned to power with a comprehensive victory in the general elections last year and set a goal of making India a $5 trillion economy by 2025. This dream, which is shared by 1.3 billion Indians, is currently in rough waters as the Indian economy is going through its most challenging phase since 2008. GDP growth has shrunk over the past few quarters. Projections by agencies including the International Monetary Fund (IMF) and the Reserve Bank of India (RBI) are not very encouraging. Unemployment is rising (7.7% in Dec., 7.48% in November), industrial output is falling; so is consumer demand.
The government has responded to the challenges with a slew of measures in the last six months. India Inc. was pleasantly surprised by a cut in corporate tax rates (25.17% for domestic companies and 17.16% for new domestic companies engaged in manufacturing) coupled with the abolition of minimum alternate tax. Further, the enhanced surcharge on FPI/FIIs introduced in the Union Budget 2019 was rolled back. The GST council also doled out certain sops to ramp up exports and real estate markets. Most of these measures are expected to yield positive results in the long term and stimulate the supply side of the economy in the short-term.
One of the key hurdles to growth is the credit crunch caused by the ailing financial sector—both banking and non-banking. The government has initiated some measures in this direction such as bank recapitalisation; directives to banks to timely pass on the benefit of the reduction in RBI lending rates; consolidation of public sector banks, etc. However, financial sector reforms are key to solving the credit crunch and the government should announce some concrete measures in the Budget on this front.
In order to boost consumption, public spending by the government is equally important. The recent announcement by the government about the proposed $1.4 trillion investment in infrastructure projects in the next five years is a welcome move. A concrete plan should be laid out in the Budget for such public spending in order to propel consumption. Further, in order to revive the rural economy, a fresh impetus to rural employment schemes such as those under the Mahatma Gandhi National Rural Employment Guarantee Act and measures to support the ailing agricultural sector are equally important. These measures may lead to an increase in the already high fiscal deficit, but, given the current economic situation, resorting to fiscal consolidation may make matters worse.
The government is also expected to provide some relief in personal income tax to boost consumption, but it may not yield the desired results given the relatively smaller personal tax base in India. Another measure on cards is to monetise the revenue stuck in pending tax disputes by introducing an income tax settlement scheme. The settlement scheme could be a game changer not only in increasing the immediate revenue collection for the government but would also go a long way in improving investor sentiment. We may also witness new investment-based incentives being introduced, though it is unlikely that existing profit-linked tax holidays may be continued. Measures to encourage startups and entrepreneurship are also on the cards.
Finance minister Nirmala Sitharaman has her task cut out. She has to balance the fiscal deficit and the economic growth, while juggling the expectations of various stakeholders, viz. India Inc., vulnerable segments of the society, and the growing middle class. The Union Budget 2020 could be the trigger to turning around the economy. Given the majority that the government enjoys in Parliament, it should be able to take some tough measures in this Budget to put the economy back on track and achieve the $5 trillion economy by 2025.
Views are personal.
The author is partner, corporate and international tax, PwC India. Sandesh Kumar, associate director, and Gurwinder Singh, manager, also contributed to this article.