The government decided to significantly reduce the income tax burden in the Union Budget to increase consumption and boost the economy. Finance Secretary Tuhin Kanta Pandey said that though the decision to make annual incomes up to Rs 12 lakh tax-free would lead to a revenue loss of Rs 1 lakh crore, it will spur the economy in a manner that is “probably impossible to fathom”, by putting more disposable income into the hands of people.
“The fact is that there was also angst, which I think the government noticed. The second is also the economic reason [slowdown]. This is a good and a new deal,” he said.
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He said putting more money into the hands of people will lead to increased consumption, which will act as a multiplier and boost economic growth.
“Normally, we say an investment multiplier is more than the consumption multiplier… But the state of economy that we have today, it requires all kinds of engines to be fired. Therefore, agnostic of that, I think we should really be trusting the people’s wisdom, whatever they want to do. It will come back and the economy will get a boost,” he said, adding that “Lakshmi baantne se badhti hai (distributing wealth also increases wealth)”.
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“If the money comes to the government, it will be put in a certain way. If the money goes back to people, the money is distributed in a more equitable way and I’ll explain why. If I give the money to you, you have three choices. You can consume, as per your choice — be it on travel, dining, services, or consumer durables — which will be much more broad-based and not just be in steel and cement,” he added.
Increased Credit Flow
The finance secretary further said that increasing India’s savings rate and increasing bank deposits could support credit flows to critical segments, such as micro, small, and medium enterprises (MSMEs), if people opt to save instead of consuming.
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“Third, you may choose to invest directly. Have we forgotten about household investments? Millions of houses are being made or rebuilt by people on their own across small towns. They raise the money, order things on their own, get a contractor to build or rebuild their own houses. That’s how it used to be and still is in many places,” he said.
On being asked whether an assessment was made regarding the potential impact of the tax stimulus on growth, he said: “What kind of multiplier will operate will depend upon the mix… It could be consumption plus investment in some cases. In either case, in the current situation that we are here, whatever you would do, it helps.”
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Consumption will spur demand and help private investments, savings will boost bank deposits, and so on, he said.
“So it is a relief and it is also a policy choice that the government has exercised in order to see that this extra disposable income will come back to the economy and lift the spirits. This would enhance the weakening growth engines of demand and address the slowdown concern too,” he further said.
RBI Rate Slash Possibility
To a question whether the rate cuts by the Reserve Bank of India (RBI) will help revive the growth in tandem with the Centre’s stimulus, he said. “Let’s wait for Friday. They will decide autonomously. I will not hazard any guess on what the RBI will do, but its stance has been that inflation is coming down… Now, what is the level they will be comfortable to announce a rate cut, is for them to decide.”
He further said that the Budget is “absolutely non-inflationary”. With the fiscal deficit reined in at 4.4 per cent of the gross domestic product (GDP), he also dismissed suggestions that public capex has not been pushed this time, saying they “reflect inadequate understanding”.
“Our effective capital expenditure is kept at Rs 15.48 lakh crore, not just the Rs 11.21 lakh crore to be directly spent by the Centre, as government funding will help states’ capex too. On top of that, there is another Rs 5 lakh crore from public sector firms, so total capex is about ₹20 lakh crore,” he added.
