Govt considers tax reductions as part of $6 billion consumer boost

By Ruchi Bhatia

Prime Minister Narendra Modi’s government is considering consumption-boosting measures worth more than 500 billion rupees ($6 billion) in India’s upcoming budget, including tax cuts for lower income individuals for the first time in seven years, according to people familiar with the matter.   
 

Officials in the Ministry of Finance have discussed proposals to reduce taxes for consumers with the highest propensity to spend, the people said, asking not to be identified because the talks are private. Individuals with annual earnings of 500,000 rupees ($5,987) to 1.5 million rupees — currently taxed anywhere from 5%-20% — could benefit from the move, the people said. A new tax slab may also be considered, they said.  

The details of the plan are still being worked on and a final decision will be taken closer to the time of the budget, due sometime in July, after approval from the prime minister’s office, they said. Despite the revenue loss from the tax changes, the government plans to stick to its fiscal deficit target of 5.1% of gross domestic product for the current financial year, one of the people said.   

Almost half of the 500 billion-rupee worth of measures will come from tax cuts, with the rest coming from other programs, the people said. Talks are underway to raise the annual cash payment to small farmers to 8,000 rupees from the current 6,000 rupees, they said. In addition, there are also discussions to increase the annual payment under the minimum job guarantee program, and expand financial support for women farmers, they said. 

Finance Minister Nirmala Sitharaman is holding pre-budget consultations with stakeholders, including economists, trade unions and industry chambers this week. Local media reported the budget for the new Modi government may be announced on July 22.

A finance ministry spokesperson didn’t immediately respond to emails seeking further information.

Modi’s Bharatiya Janata Party failed to win an outright majority in recent parliamentary elections for the first time since it swept to power in 2014, with joblessness and the high cost of living weighing on voters’ minds. Economists have said the BJP’s weaker-than-expected performance at the polls may see it shift toward more populist spending measures in the budget. 

“A tax cut is a good way to give a push to demand levers in the economy especially as mass consumption has been weak,” Yuvika Singhal, an economist at QuantEco Research, said by phone. “While lower taxes will boost disposable income of people, more such steps will be needed to lift consumer activity going ahead.”

The government needs to infuse funds into the economy in a way that shows quicker results, one of the officials said. However, despite the extra spending, the government will maintain its fiscal deficit target for the current year, largely helped by strong revenues and a $25 billion dividend from the central bank, the person said.   

State elections are looming in at least three key regions, including Maharashtra, in coming months, with the BJP looking to shore up its support. 

Private consumption — which includes spending by households and businesses — expanded 4% in the past fiscal year, less than half the 8.2% pace of economic growth in the period.