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Budget 2020: FM needs to find a balance between growth and fiscal discipline

Equity and Economy | February 01, 2020

Budget 2020 Expectations: The Union Budget 2020 will be all about finding a balance between supporting growth and arresting slowdown and, at the same time, sticking to fiscal prudence, given the tight situation of the governmet’s finances and state of the economy. The slowdown in the economy, high unemployment, and falling consumer spending are urging the government to intervene and take up strong growth measures in the budget to revive the ailing economy.

As per the latest estimates, the GDP growth rate has been revised downwards, and the Indian economy seems to be growing at around 5 per cent, which is the lowest in the past decade. GDP growth rate is running at an 11-year low, and auto sales have plunged, frightening surge in corporate defaults and sluggish credit off take are the few immediate headwinds India is facing. All these factors have weakened consumer sentiments and have refrained fresh Private Capex allocation, thus exerting stress on the job market.

Investors are expecting a strong push in the infra space and a personal income tax cut to boost consumption. An optimistic command from the Finance Minister’s end can address these impending issues of the nation and will arrest the slowdown in the economy. However, giving away too many doles to revive the ailing economy may also result in the government’s pockets run empty and Fiscal strain to go beyond control as corporate tax cut lately has already limited government measures to ramp up revenue collections.

Nirmala Sitharaman, the FM, will present her second Union budget amid mounting fiscal challenges and pressure that the economy is facing. Reduction in Corporate Tax rates was a proactive step taken by the government to boost investor confidence. While the industry overwhelmingly received the slashing of corporate taxes, now there is a growing demand from all industry bodies/representatives for a reduction in personal income tax rates to revive much-needed consumer spending and thus to get India’s Consumption Story back on track. There is a consensus that the FM will tweak personal income-tax rates (widen the tax slabs) to ensure that the middle-income class has more disposable income in their hands to spend, which would help the government to mitigate the majority of the headwinds that the economy is facing, mostly pertaining to consumer spending.

Besides, there are a lot of sector-specific issues that the government needs to take care of. The real estate sector has been struggling for revival for a long time now. Realty is the second largest contributor to GDP after agriculture and one of the largest employment generators in the country in both organized and unorganized space; its importance cannot be overlooked. So, a boost from the government will help the sector as well as adjoining sectors like cement, steel, and consumption, etc. to revive.

Real estate players in the country expect the government to take initiatives like higher deduction on payment of home loan interest and revamp the already struggling sector. A hike in the Rs 2 lakh limit on housing loan interest rates would augur well for the buyers of the affordable housing categories. This will also help to replenish unsold inventory and help real estate developers to take up fresh projects, which in turn will mitigate concerns related to the job market.

For financial markets, despite broader indices being near to all-time highs, there is a strong consensus call for tweaking LTCG tax to bring equity investments in line with global benchmarks as most developed financial markets don’t attract LTCG taxes. However, complete removal of LTCG will be a very bold step for the government to take as it has to answer its critics for scraping a much-debated tax, which was introduced just two years back.

 

Instead, FM may consider increasing the current limit of exemption from Rs 100,000 to Rs 300,000 and may also tweak the definition of ‘long term’ from 12 months to 24 months investment period. Rationalizing taxes & charges for long-term equity investment will boost investors’ sentiment and help the government to not only raise its disinvestment targets but also achieve them comfortably. Besides, removal of the Dividend Distribution Tax will be more encouraging and work as an impetus, leading to more inflows to our equity markets.

 Note: Article originally appeared in financialexpress.com. Link to the source article is as mentioned below:

https://www.financialexpress.com/budget/budget-2020-fm-needs-to-find-a-balance-between-growth-and-fiscal-discipline/1841997/

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