Vivek Kaul: Does the budget signal a change in the government’s growth strategy?

The hope possibly is that a pickup in private consumption might motivate companies to invest and expand. (Image: Pixabay)
The hope possibly is that a pickup in private consumption might motivate companies to invest and expand. (Image: Pixabay)

Summary

  • There’s a shift in emphasis from building infrastructure to stoking consumption, but this doesn’t solve the country’s basic problems. When, for example, will governments ‘get out of the way’?

In the stock market circles of Central and South Mumbai, the phrase ‘kya lagta hai’ (KLH, what do you feel)? can be a conversation starter. During the course of any such conversation in the last few months, the KLH crowd would eventually get around to cribbing about how high taxes are holding the stock market and economy back.

Nonetheless, throughout this fiscal year following the July 2024 budget, tax rates have largely remained unchanged. So, why has the KLH crowd been so vociferous about high taxes lately? And why was there so little noise earlier?

Also Read: Mint Quick Edit | Sitharaman’s income tax bonanza: Time to rejoice

Stock prices peaked in late September and have fallen since. This could potentially reduce the annual bonuses for the KLH crowd, which may explain their recent outpourings on the government needing to lower tax rates to increase disposable income, stimulate spending and boost companies, the stock market and the economy.

Now, those who shout the loudest are likely to be heard the most. The annual budget for 2025-26 shows that the KLH crowd has been heard. Thanks to a rebate, no income tax needs to be paid for income of up to 12 lakh. Tax slabs have also been widened, leading to the government forgoing tax revenue of 1 trillion. This raises several points.

First, the tax forgone will end up as income in the hands of people. And this income is likely to be spent, lifting consumption to some extent and helping companies operating in that space.

Also Read: Ajit Ranade: The budget’s consumption stimulus will stand India in good stead

Second, India’s household financial savings stood at 7.9% of GDP in 2018-19 and have fallen since. In 2023-24, they stood at 5.3%. It’s likely that households will want to repair their balance sheets, and hence, some of the tax cut will find its way into savings. This can provide something of a cushion to the stock market amid all the selling by foreign institutional investors.

Third, a cut in indirect taxes—like a cut in excise duty on petrol and diesel—would have put money in the hands of more people and been a fairer way to go about things. Nonetheless, a fall in fuel prices by a few rupees per litre wouldn’t have been as much of a WhatsApp event as the income-tax cut has been.

Fourth, the budgeted capital expenditure of 11.2 trillion in 2025-26 is more or less similar to the budgeted figure of 11.1 trillion in 2024-25. With low-hanging fruit having been plucked, the government now has fewer opportunities to expand such spending. Also, the tax cut forces it to rein in some other expenses like major subsidies.

Also Read: Union Budget 2025: Govt dials up consumption and walks the fiscal talk

So, there seems to be a change in strategy to drive economic growth. In the last few years, the government’s capital expenditure has been a major part of it. Along with that, it has tried to encourage private investment through incentives and a lower corporate tax rate. But this hasn’t really worked. Given this, there seems to be a fresh focus on the Indian consumer. The hope possibly is that a pickup in private consumption might motivate companies to invest and expand.

Fifth, while the government might have adopted a new strategy, the impact of tax cuts on the overall economy might be limited. Why? The total expenditure of the government in 2025-26 is budgeted at 50.7 trillion or 14.2% of GDP. In 2024-25, it’s at 47.2 trillion or 14.6% of GDP. So, spending will proportionally shrink at a time when the economy is not in the best shape. Of course, this is in line with the Centre’s efforts to cut its fiscal deficit.

Sixth, India’s number of income taxpayers will fall further to around 15 million. These are people who pay a bulk of the country’s income tax collections.

Also Read: Andy Mukherjee: India has slashed income tax but still needs to snip red tape

In 2025-26, the government expects to earn 14.4 trillion through income tax, or 14% more than 12.6 trillion in 2024-25. Is this too optimistic? The income tax mop-up in 2024-25 is expected to be around 20% higher. One reason is that the booming stock market until September boosted securities transaction tax (STT) collections, which are expected to rise 63% to 55,000 crore in 2024-25.

The government expects the stock market to keep filling its coffers, with the STT collections expected to go up 42% to 78,000 crore next year, at a time when trading volumes are falling. Also, given that a smaller number of taxpayers have to fund this growth, the assumption seems to be that their earnings will rise strongly. For this to happen, India Inc has to do well, but corporate sales growth has been stagnating.

Seventh, the burden on income taxpayers to fund the government’s expenditure has gone up. In 2024-25 and 2025-26, corporate tax will form a fourth of the gross tax revenue, while the expected proportion of income tax has risen from 32.6% to 33.7%.

Also Read: Revise direct taxes: Corporate taxation needs to be progressive

Eighth, the Indian economy’s basic problem remains. As the Economic Survey says: “India will… need to create 78.5 lakh new non-farm jobs annually till 2030." This, at a point when the proportion of our workforce working on farms has actually gone up.

There is only so much a government’s budget can do about this. For non-farm jobs to be created, small firms need to grow bigger and the private sector has to take the lead. Or, as the survey puts it, governments in India need to “get out of the way." But will they? They are busy micro-managing goods and services tax rates applicable to different kinds of popcorn. How does one solve a problem like that?

The author is the author of 'Bad Money'.

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