The government must be going ga-ga over its demonetisation move undertaken early November last year to eradicate black money from the system, but the country's fast-paced economy, however, seems to have lost some edge or is facing the prospect of a slowdown in the coming months. In the wake of such short-term uncertainty prevailing over the growth prospects, finance minister Arun Jaitley may take measures to revive the economy during the forthcoming budget.
Among the measures expected, the finance minister may look at putting in more cash in the hands of individuals by reducing the personal income tax slabs. This could be done to accelerate consumption, which in past few weeks has reportedly turned subdued, especially, post the demonetisation announcement. After the government put restriction on cash withdrawals from banks and ATMs following the note ban, consumers in urban areas cut back on spending, while the rural counterparts were deeply impacted due to the ensuing cash shortage in the system.
"Some fiscal stimulus measures to embed a feel-good factor and stimulate consumption and investment could be taken up, " a report in The Economic Times said quoting Sudhir Kapadia, national tax leader, EY.
According to experts, the government's likely move to cut personal income tax to revive demand stems from the fact that rise in bank deposits post demonestiaton and introduction of goods and services tax (GST) later in the year would result in increase in the country's tax base.
Currently, the lowest tax slab of 10 percent is levied on income between Rs 2.5-Rs 5 lakh per annum. Experts feel, the Rs 2.5-Rs 5 lakh slab could be widened and tax rate may also be lowered further so that more cash will be in the hands for spending.
Further, with the government eyeing an increase in tax base, enhanced deductions, especially in housing loans, is also on the anvil in order to give a fillip to the struggling housing sector post the note ban.
In a meeting between Prime Minister Narendra Modi and a group of economists organised by the NITI Aayog held late last month, the message from the interaction broadly hinted at measures that may benefit common taxpaying citizens and push growth as well.
The discussion focussed on simplifying tax measures for corporate and personal income tax, besides reducing the tax rate to match the global standards.
"Tax simplification figured quite a lot... on direct taxation, corporate and personal income tax, reducing exemptions, bringing down the tax rate and aligning tax system to make India competitive with international destinations," The Economic Times had reported quoting NITI Aayog vice-chairman Arvind Panagariya.
As the Modi government prepares to announce its third budget, the government is also looking at offering incentives and packages to boost consumption and prop up growth. It also discussed on Modi government's plans to double farmers' income in the next six years time.
Last month, Finance Minister Arun Jaitley said infrastructure investment needs a booster and his next Budget in February will focus on encouraging more public as well as private spending to boost economic growth.
The Finance Minister said there is a long-term potential of more resources getting into the system and that is going to be the top priority. “Therefore, the areas where we were lacking, whether in terms of encouraging investment of the private sector and so on, I think these are going to be the areas where budget should concentrate on,” he said.
Not just common man, the government may also provide some relief to India Inc on the tax front. The government has amply made it clear about its intention to rationalise the corporate tax rate to 25 percent in next four years time, beginning with this year, while phasing out the various exemptions given to companies.
While the process to remove exemptions in a phased manner has already begun in the last budget, the move to reduce tax may gain momentum in this year's budget in order to prop up private sector investment, which has been languishing over last few years.
Already, the government expects growth to fall to 7.1 percent this fiscal from 7.6 percent in 2015-16 amid slowing growth.
Not just that, India's strong economic momentum could face the prospect of a downward trajectory in the next couple of quarters as falling sales and slowing consumption amid the lingering cash shortage could stiffle growth, cautious economists.
"Using the cash elasticity of GDP, we estimate that over a year, economic growth can fall by 0.7-1.0 percentage points, with the maximum impact in the immediate two quarters, which will see a large contraction in 'effective' money supply," HSBC said in a research note last month.
According to a report by Ambit Capital, GDP growth is likely to decelerate from 6.4 percent in first half of this fiscal to 0.5 percent in the second half with a distinct possibility of GDP growth contracting in third quarter of this fiscal.
Foreign brokerage Bank of America-Merrill Lynch also sees the demonetisation exercise impacting the country's growth in the next two quarters, and estimates GDP to fall by 50 basis points.
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Updated Date: Jan 31, 2017 12:09 PM