I am using the word ‘reloaded’ as this is my 2nd post on the subject – the 1st was written before the last budget in July 2019 (Expectations from Budget 2019 – a common man’s perspective).A quick recap of the previous post
In the previous post, I had mentioned poor consumer sentiments to be the main reason for the economic slowdown. The poor sentiments were because of the fear of the unknown (income tax notices, GST complications), rural stress, tight liquidity conditions, money stuck in real estate, markdowns in equity and debt investments and corporate shake-ups (Yes Bank, DHFL, ILFS, Zee).
Solutions hoped for included measures to revive the real estate sector, address liquidity issues of the financial sector, ease out GST/ income-tax compliance/ reconciliation/ refund mechanism and structural solutions for the agricultural sector.Back to the current times
Last budget and announcements since then have been a hit and miss so far. There is acceptance and announcements on many counts but results so far are far from satisfactory. Not much has been done to improve the consumer (demand) sentiments.
GDP continues to slide, autos remain volatile, consumption numbers muted, banking credit growth and asset quality confusing, liquidity tight and rural economy struggling. To make the situation difficult, inflation has recently started creeping up restricting RBI’s ability to offer lower interest rates to boost the demand. Fiscal deficit numbers are also expected to overshoot the budgeted targets, further restricting government’s ability to incentivize fiscally.
Whether personal income tax rate cuts is the answer to the economic problems?
Consensus is advocating a strong fiscal push to revive the demand. Significant cut in personal income tax rates is already assumed !
I doubt… unless we are talking about significant reductions… few thousands here and there is not going to make much of a difference !
Yes, there would be an initial cheer but it might wear off sooner than many think. Given the current environment, I expect any small cash flow improvements to get parked towards saving and not spent on consumption.
In some ways you can draw a corollary to the corporate tax cuts that were supposed to incentivize companies to work on boosting the demand. Instead, companies are using cash flows to reduce debt and cleaning their own books.
Measures that I would hope for…
Environment is that of risk avoidance. It happened with corporate tax cuts and may potentially also happen with personal income tax cuts.
Let me first admit – as such I continue to be optimistic about the Indian economy. Yes, the numbers are not looking good but as an observer when I look around I don’t see people scrambling for cover !
Yes, there is caution but people do have money. It’s just that they don’t want to overspend.
People are holding back as there continues to be a fear of unknown – money stuck in real estate/ financial markets, tax notices, corporate defaults, tight liquidity, news flow around events like CAA/ 370 etc.
Economic problem can however now worsen fast – liquidity problems have started trickling down to small businesses that can lead economy into a tailspin. I hope the government acts now and acts big. Rather than doing bits and pieces for everyone, it may make sense to go big on selective areas.
1. Revive real estate
If I have to select one sector to focus on revival, it would be real estate. Reasons – it’s linkage with almost every other sector and the fact that so many Indians are linked with it emotionally/ financially.
It’s a hard asset, provides mental comfort, has aspirational value and many Indians over decades have made their wealth from this sector.
The fact remains that currently lakhs of crore is stuck in this sector (estimated between Rs 5-7 lakh crore) and unless cured, we maybe fast approaching towards the next round of economic melt down.
I am not advocating to create a bubble
The sector may not be as difficult to revive as it may seem. One only needs to provide the requisite fiscal benefits to help promoting it as a viable investible asset.
- Tax benefit was capped at Rs 2 lakh on second home in budget of 2017. This in my personal view was one of the key reasons for people starting shying away from real estate investing. Ideally it should be reinstated.
- Recently the stock market veteran Mr. Rakesh Jhunjhunwala suggested to offer long term capital gain tax exemeption (at the time of sale) for property bought over next 12 months.
These measures can be very effective, are not much fiscal negative and on the contrary can generate significant revenues for the government in terms of registration and stamp duties.
2. Significantly facilitate Make in India
Real estate can help kick start the economic revival very quickly.
I am intentionally using the word ‘facilitate’ instead of the word ‘push’.
Large scale manufacturing in India is extremely important to create a long term structurally strong economy and also address the ever increasing unemployment problem. This should be targeted both towards domestic consumption and exports.
Big ticket fiscal benefits, export incentives, crystal clear land acquisition policies, speedy regulatory clearances
This is again not fiscally negative as you are prompting people to invest and tax incentives are primarly targeted towards future profits.
We have huge intelligent and hard working manpower. Going creative and big on Make in India can do wonders to our fortune in short term, medium term and long term !3. Set clear rules of the game
This is in relation to dealings with the government departments – both as an individual and as a corporate.
- Taxpayer’s dealing with the income tax and the GST department
- Businessman’s dealing as a government contractor
Clarity and certainty… of information and money… is critical to a create a sustainable viable relationship between dealing parties.
Yes, the government has consistently announced measures to improve transparency in dealing with taxpayers as well as businesses but on ground issues remain. I consistenly see people speaking about receiving wrong income tax notices, GST refunds getting stuck, government contractors receiving delayed payments and so on…
Confidence takes the biggest hit when genuity suffers
Above are the three main areas that I will be hoping to hear announcements upon. Others including rural economy driven schemes, divestments, fiscal deficit, import duties, sector specific announcements, tax rates etc are given and form part of the normal course.
What I would instead be hoping for is a breakthrough budget !