INDIA  :   Business

Indian budget: Magic pills eagerly awaited

Saturday , 20 February 2016

The Indian economy is slowing down and markets are in a bad state. There is a big question mark over the effectiveness of the current government to pass any meaningful regulations, given their lack of majority in the Upper House, as well as a charged-up political environment. The markets have been on a continuous decline and have shed over a fifth of their value since the last budget was announced.

Due to these reasons, investors are waiting on the new budget, with high hopes that it will help boost the already sunken markets.

Before we look at the expected boost, let’s do a quick assessment of the ground reality. The Indian economy lost momentum in Q3 of FY16, due to slower agricultural and industrial growth. Agriculture was hit hard because of lower than normal rainfall, which was deficient to the tune of 23%. Industrial activity too slowed down, on back of weak investment demand, a high number of stalled projects and low capacity utilisation. Lead indicators for the services sector were mixed. India’s exports contracted for the thirteenth successive month in December 2015. However, softer petroleum, oil and lubricants (POL) and commodity prices, helped to contain the trade deficit. Retail inflation rose for the fifth month in December 2015, across all constituent categories due to unfavourable base effects.

In simpler words, the outlook is not very rosy and worse is expected to come, resulting in a double whammy in the form of challenges in earnings and continued retail inflation, eating into savings.

With this in mind, we will now look at what each constituent is demanding for this budget.

What common people want..

Higher tax slabs

India has seen a spate of rising inflation, wherein costs of core services remain at elevated levels, with sudden supply shocks affecting prices of commodities, time and again – be it pulses or onions, etc. This has impacted the quantity of goods and services which a common person can buy. As a result, it makes sense for the government to increase the common person’s disposable income, by increasing tax slabs. We recommend Rs 4 lakh per annum as the basic slab for the common person.

More deductions

There is hope that the total taxable limit is increased to Rs. 2 lakh, along with a clear demarcation for education, which is currently consolidated for all long-term and short-term saving instruments, including provident funds, pension funds, and equity linked savings schemes etc. There’s further expectation to full deduction on the principal of home loans and to provide tax exemption to NPS (National Pension Systems) on matured amounts. This will encourage more savings, channelise these into productive investments and increase disposable income of the common person.

Cut in indirect tax rates

The 2015 budget had raised excise duty, not only on cigarettes, but also household consumption items like packed condensed milk, peanut butter, mineral and aerated waters, iced tea, lemonade and other beverages. Many of these items impact lower middle class families more severely and also put substantial upward pressure on prices. A rationalisation of these taxes, on items such as lifesaving drugs, common food items, etc, should be prioritised. Further, Swachh Bharat cess is equivalent to double taxation in urban areas, where people are already paying municipal taxes for such services.

Maintain administered rates

There is growing clamour to cut interest rates on PPFs (public provident funds), postal savings, etc, as it hampers effective monetary policy transmission. However, many Indians have fallen into a formal saving habit, precisely because of it. We think there should be a differentiated approach in terms of maintaining the existing rate of interest, up to a threshold amount and then paying market rates on the balance amount. This will ensure that the common person benefits, even as rate transmission takes place effectively in the economy.

Rationalise allowances

Limits of certain tax exempted allowances have not been revised for quite some time, while inflation over this period has made those numbers meaningless. A common person will benefit if those allowances (i.e. travel allowance, children’s education allowance, hostel allowance etc), are hiked immediately in the 2016 budget.

NRI demands

The 2015 budget had nothing for NRIs, 2016 may not be very different. That being said, an NRI hopes for at least standard deduction for foreign salary and credit of state and municipal income taxes paid, even if there is no double taxation avoidance treaty in place. Secondly, NRIs expects income on NRO accounts to be made tax-free, similar to NRE accounts.  Finally, NRIs will prefer if tax filings are made easier with full e-filings, appearances via video-conferencing, lesser reporting and an increase in transaction size threshold, for high-value transactions.

What would corporates like?

Corporates are keen to ensure that certain key legislations are passed along with a further reduction in indirect taxes and tax holidays to kick-start the economy.

Pass GST

The current system of taxation is onerous and time consuming on the interstate movement of goods. It was precisely for these reasons that GST was introduced. Unfortunately, this bill has not yet passed, due to a political logjam. Corporates hope that by the passing of this bill alone, it will provide a significant boost to the economy. In fact, CII estimates that GST will take GDP growth up into the 9% range.

Lower corporate tax rates

The previous budget had announced cuts in the corporate tax rate to 25% over a period of four years, accompanied by phasing out of exemptions and incentives. It is expected that the new budget will further this by announcing more cuts and putting out a roadmap for its full implementation.

Duty cuts to boost demand

While the industry is not against discontinuing these taxes completely, they believe that these indirect taxes should not be raised further and should be rationalised. At one end of the spectrum, there’s increasing demand to increase customs and countervailing duties to protect domestic industries and on the other end, there’s increasing demand to selectively provide short-term tax holidays, in order to boost demand.

What does the economy require?

Fiscal consolidation

The government has promised a path of fiscal consolidation and restricted it to less than 3.5%. Fortunately, the government will benefit from lower oil prices and increased excise duties on it, to maintain the deficit target. However, any stimulus to pump the economy may see breaches in targets. The general expectation is that the government will ensure that these targets are met.

Expansion of tax base

With only 4 crore tax payers, the Indian tax base is severely underpenetrated. This results in a higher rate of income-tax on compliant taxpayers, who develop a feeling of being treated unfairly.
It’s expected that government will take more concrete steps to bring more citizens under the tax net and increase its revenue, while allowing it some headroom to reduce tax rates.

Passage of laws

Not only is the GST bill pending, but the bankruptcy law has also been held up. Passing it will ensure creative destruction, reduce stress on the banking system and allow for overall economic growth.

Will the Finance Minister deliver?

The Finance Minister has a tough job on his hands, but then again, tough times require tough measures. The budget needs to address most of these issues and it has to ensure that it keeps the economic outlook of India, positive. Whether that can be done or whether it will be a budget similar to that of 2015, remains to be seen.