Is India moving towards spending economy?


By Rajendra Narvekar

Finance minister, Nirmala Sitaraman presented a budget amidst expectations of measures to revive the economy.  It is said that if you try to please everyone, you end up pleasing none. Exactly similar is the case with the Union Budget 2020-21 which was presented on February 1.

  There are various indicators which point out to the fact that the economy is  in bad shape. Bu, but not once did the Finance Minister admit the fact in her Budget speech. The GDP is down, unemployment rate is high, inflation is high, imports and exports are down, and electricity consumption is low. There are variety factors which contribute to this slowdown like structural, cyclical, global slowdown, demonetization, poor GST implementation etc. The demand is lacking and there is trust deficit in dealing with the government projects which ultimately land in litigations.

  The need of the hour is to boost spending and increase consumption. In this budget the finance minister has introduced two types of tax structures:  One at existing rate with all eligible deductions and the other one at lower rate without any deductions  like 80C (which includes life insurance, provident fund, education expenses, housing loan installment) and interest on housing loan. The deduction under section 80C was available at maximum amount of Rs.1.50 lakh and interest on housing loan was available at maximum of Rs two lakh.  Now by doing away with these deductions and lowering the rate of tax the finance minister is increasing disposable surplus in the hand of the consumer.

  Since it is seen that most of the persons save to take income tax benefits, with the new rate structure a person will not tend to save but may rather prefer to spend the surplus in buying consumer durables, residential houses, etc. Normally life insurance policies have a minimum paying term of 10 years although some unit linked policies become paid up after paying five premiums. Thus if a person stops saving in these policies then his disposable income rises and is available for spending.

  Indians over the past years are known to save to meet unforeseen contingencies. The younger India may drift from the tradition in line with some of the western countries. Gen X prefers to work for five days and have a great week end. The Finance Minister by introducing the two-tier tax structure may be wanting to tap this new culture among the younger lot.

  This scheme to become a success will depend on how the government formulates its social security measures like health and old age benefits. Lot will depend   on where the surplus money goes to productive or unproductive wasteful expenditure. The government may need to bring some regulation to curb such wasteful expenditure. The policy once framed need to be adhered to without making frequent changes in the same. This will boost confidence among the people. In a way the Finance Minister has made a good move in the right direction to boost the economy.

The writer is president, All Goa Tax Practitioners Association and member of the state GST Redressal Committee