Giving Bharat more in pocket, less tax on urban India can do the trick

By Rashesh Shah

As we approach the Union Budget, discussions and debates around what it should and should not contain have probably been one of the most intense we have seen in the recent past.

Given the current economic speed bump, it is no wonder that everyone is eagerly looking forward to what the Budget provides to alleviate the current slowdown. However, every booster comes at a cost, and any discussion on the Budget is incomplete without a discussion on the impact that Budget spending will have on the fiscal deficit, and whether fiscal slippage is a viable option.

While many economists term such a demand as imprudent, since fiscal consolidation has been an achievement of this government, I think providing a booster to growth should be the prime focus and some amount of slippage should be considered as the cost of re-vitalising the growth cycle. Coupled with aggressive disinvestment targets and continued government spending and tax cuts, which will boost consumption, there is an opportunity for growth recovery which can kickstart our mission to reach the $5 trillion GDP target by 2024.

This Budget is an opportunity to be creative and think out of the box to arrest lagging consumption, improve corporate investments and inspire business confidence.
To begin with, while the bold step of cutting the corporate tax rates was a strong move, Budget 2020-21 can be used to cut personal income-tax rates. Further, if some more relief can be provided to the middle tax brackets through an increase in tax slabs and higher tax exemption limits, it would certainly brighten demand for discretionary spending like auto, housing and household goods, which has slowed down in recent times.

The key thing the Union Budget must aim for is how to spur demand, because there is a problem of consumption, which has been the major engine of growth so far. If we can get that part moving, investment will pick up after a few quarters. Recent data indicates rural consumption has slowed down due to a rationalisation in rural incomes, which in turn has eroded demand for consumer goods.

The situation is no different in urban India. Since rural India accounts for 36-40 per cent of overall FMCG spend, and has historically been growing faster than its urban counterpart, it is time to address the slump and reward it with more in the hands of rural consumers, especially farmers, who can be incentivised via many of the institutional means of credit, such as Kisan Credit Cards.

However, such relaxations would automatically put pressure on finding resources to sustain growth. Here, there is an opportunity to be inventive by raising funds through asset sales, and not sustain it completely by additional borrowings.

As of now, we have the process for privatisation of several PSEs, including the blue-chip BPCL in place. But no effort should be spared to meet the proposed target of Rs 1.05 lakh crore from disinvestment this financial year. Since the government has achieved only a portion of it so far, and implementation of many of these plans does take time, every effort must be made to reach closer to the stated target.

In parallel, a long-term blueprint to privatise as well as monetise larger assets such as highways, airports, sea ports and power grids through the toll-operate-transfer model for viable, long-term revenues can help provide visibility of long-term plans and help private players take a structured approach to buying such assets.

The fact that large foreign investors, especially pension funds, are showing an active interest in buying assets in India is positive for our economy and a planned approach will send out all the right signals.

The expectation is that the last quarter of the financial year as well as the first few quarters of the new financial year will start showing an improvement in both corporate numbers and overall confidence in the economy. However, the government will have to step in to accelerate the momentum towards a full recovery a few more quarters down the line.

A fiscal expansion, without worrying too much about the fiscal deficit slippage, along with active implementation and monitoring of huge infrastructure projects announced would be vital for boosting demand and triggering more investments.

(Rashesh Shah is Chairman and CEO of the Edelweiss Group. Views are his own)