With consumer confidence at six-year low, government has few excuses left not to go in for a personal tax cut

  • Consumer confidence trend has been assessed through the current situation index (CSI) and the future expectations index (FEI), both recorded a decline in September.

  • The September round of business confidence surveys isn't a surprise but a reaffirmation of the weakened consumer sentiment that has persisted over the last several months

  • The 25 bps cut was the fifth rate cut in this cycle to give a leg-up to a faltering economy

Lower consumer confidence means lower spending by households on goods and services. Consumer confidence declined to a six-year low in September as sentiment on the overall economic conditions and employment availability expectations remained negative among households, according to a survey conducted by the Reserve Bank of India (RBI).

Consumer confidence trend has been assessed through the current situation index (CSI) and the future expectations index (FEI), both recorded a decline in September. Both CSI and FEI are compiled on the basis of net responses on the economic situation, income, spending, employment and the price level for the current period and a year ahead, respectively.

 With consumer confidence at six-year low, government has few excuses left not to go in for a personal tax cut

Representational image. Reuters

The survey was conducted among 5,192 households in 13 major cities with respect to perceptions and expectations on the general economic situation, the employment scenario, the overall price situation and their own income and spending.

The September round of business confidence surveys isn’t a surprise but a reaffirmation of the weakened consumer sentiment that has persisted over the last several months and is also reflected in the sales of goods and services. For instance, the automobile sector has been one of the worst-hit with sales declining to the lowest in two decades.

How can the consumer sentiment be improved and demand revived? The answer is simple—bringing confidence in consumers so as they are willing to spend by putting more money in their hands. What has been done so far? The RBI rate cuts have proved to be a dud as far as consumer spending is concerned.

Consumer confidence chart1

Consumer confidence chart2
(Source: RBI)

In the last RBI policy, the monetary policy authority (MPC) cut the repo rate by another quarter basis points to 5.15 percent. One bps is one-hundredth of a percentage point. Along with this came the aggressive reduction in GDP growth forecasts—to 6.1 percent from the earlier projection of 6.9 percent in the current financial year. This means, the growth, which slipped to 5 percent in April-June quarter, is unlikely to see a revival anytime soon.

The 25 bps cut was the fifth rate cut in this cycle to give a leg-up to a faltering economy. With this cut, cumulatively, the central bank has cut the rate by 135 basis points. The problem is that, even with this kind of rate cut, the end-consumer or the borrower has not benefitted hugely. The reason is that banks are margin-hungry and haven’t passed on the rate cuts to the borrower beyond 30-40 bps. In that sense, an inadequate transmission has turned monetary policy into an ineffective tool to spur demand.

On the fiscal side too, the government response has been poor to create consumer demand. Till now, there have been no major tax cuts on personal income tax. The big reduction in corporate tax can translate into spending only if companies pass on the benefit to the customer in the form of price cuts. The right thing should be to announce a cut in personal income tax rate. The tax slabs should be rationalised in such a manner that it would increase compliance and ease the burden on lower income brackets.

The Direct Tax Code report that was submitted recently to Finance Ministry is not out yet. But the government seems to be inclined to work with some of the key recommendations of the report to rationalise income tax slabs. Going by this, a 5 percent tax rate will be applied to those with an income of Rs 2.5 lakh annually and up to Rs 5 lakhs, 10 percent for an income up to Rs 10 lakh, 20 percent up to Rs 20 lakh and 30 percent for income up to Rs 2 crore and 35 percent for those with income of above Rs 2 crore.

The rationalisation of tax rates is essential at a point when the economy is slipping. The government should also address concerns of rising unemployment by upping public spending in infrastructure and encouraging more household savings. There is no magic wand to revive consumer demand. But an announcement for cutting personal income tax must be made now. That will give some room for households to spend and thereby do the trick.

Updated Date: Oct 07, 2019 14:43:10 IST