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

Summary
- Easing the compliance burden of businesses is more important for India’s economic growth than tax cuts given by its budget. Will the Economic Survey’s call to ‘get out of the way’ be heeded?
The Indian middle class, and even some of its top 10% earners, are now fully exempt from income tax. Small businesses don’t expect such largesse; they just want to know when they will be free of stifling red tape.
Depending on whom you ask, India’s government is either being bold in raising the effective threshold for paying tax by 1.7 times. Or it’s a tacit admission that consumption taxes are so high that even people making five times the average adult wage are struggling to fork out income taxes. As I wrote in January, the economy is in dire need of a readjustment, and getting people to spend is the only way.
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The $12 billion fiscal stimulus, estimated at about 0.5% of private consumption, may not fully reverse the slowdown in urban spending: 37% of respondents said in a recent survey that they expect quality of life to deteriorate over the next 12 months, a level of despondence not seen since Narendra Modi became PM in 2014.
Still, the rebate won’t hurt. Even if the recipients save a part of their bonanza, the tax relief should boost consumer sentiment, at least for now. With a little luck, the afterglow will last until it’s safe for the Reserve Bank of India to cut interest rates and revive the economy from its slowest pace of expansion in four years.
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The timeline for a monetary stimulus is hard to predict. While stubborn domestic inflation eased to 5.2% in December, it’s still well above the 4% midpoint of RBI’s target range. Plus, the rupee is weakening, and US policies are clouding the outlook for US interest rates. Premature stimulus by RBI could trigger a capital flight.
The upshot: When Indian interest rates do start to ease, finance minister Nirmala Sitharaman should make the most of it and slip in new fiscal sops for affordable and mid-market housing—a segment that has dropped 36% in two years.
A fresh property cycle that’s not limited to luxury homes will be welcome. For one thing, it will draw out surplus labour, which has been stuck on the farm since the pandemic, into urban construction jobs. For another, banks will be able to use income on mortgages to absorb losses on unsecured personal loans.
That alone, however, won’t be enough to revive economic growth or ensure financial stability. With the share of manufacturing in the economy at its lowest since 1960, new factory investments hold the key to boosting employment.
Sitharaman’s budget cut tariffs on many imports, including materials and machines used to make lithium batteries. This should help the EV industry. It’s an encouraging departure from the protectionism that has crept into India’s trade policy. Rather than make India self-reliant, the lurch towards autarky has left the economy even more dependent on China.
But tariffs aren’t the whole story. The showstopper, especially for smaller firms, is India’s great unease of doing business. The most effective policies federal and state governments can embrace are ones that “give entrepreneurs and households back their time and mental bandwidth," said the Economic Survey. “That means rolling back regulation significantly."
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Sitharaman announced a panel for a review of all non-financial sector regulations, certifications, licences and permissions. She has also promised a fresh edition of the six-decade-old tax code.
Still, investors should not expect much fresh thinking from a government in its 11th year. The overarching aim of the administration may be to maximize its longevity. The pull of politics was well evident in the numerous projects Sitharaman announced for Bihar, which is headed for state polls.
A tax rebate will help a narrow group: Only 7% of Indians even file tax returns, and most of them pay nothing or very little. For a sustained boost to consumption, the economy needs new jobs. But who’ll create them? Overall public investment is expected to improve slightly after a sharp slowdown in 2024-25. But the stock market had anticipated bigger outlays on infrastructure, especially on roads and railways.
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As for encouraging private investments, a tumultuous year for the global economy may not be the right time to expect big-ticket projects from India’s corporate honchos. However, a $1.2 billion “fund of funds" for startups announced in Saturday’s budget is a splendid initiative.
But here, too, the need of the hour is simplicity. As the founder of a venture capital (VC) firm told me, any investor who takes government money to invest in new companies should expect to get bogged down in compliance. No VC firm wants to hire someone just to manage paperwork created by bureaucrats. Which is why greater ease of doing business, especially for smaller enterprises struggling to navigate the country’s bewildering regulations, is more important than the tax rebate for the middle class. ©Bloomberg