Don't expect tax sops in next budget

The finance ministry draws its optimism about economic growth and private investment revival from the healthy credit offtake and positive feedback from small businesses at a time global businesses are eyeing alternatives to China, a person aware of the discussions in the government said.

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“Multilateral agencies may be lowering their global growth forecast for next year, but India’s situation is not that bad. We are already spending quite well on rural welfare schemes like Pradhan Mantri Awas Yojana and National Rural Employment Guarantee Scheme (NREGS) that strongly support rural consumption. Anecdotes suggest that businesses facing growth prospects, especially small businesses, are in the mode of making investments as multinational companies are exploring alternatives to supply arrangements amid disruption in China. Large companies will also invest," the person cited above said on the condition of anonymity. Also, fiscal policy cannot run counter to monetary policy, which is trying to tame inflation.

Besides, the political setback that the Liz Truss government in the UK faced after proposing sharp tax cuts has not been lost on policymakers here, the person said, suggesting that fiscal responsibility is a key goal for the government.

Last month, Truss resigned after 44 days in office after her government’s “high growth, low tax" economic plan that included a £45 billion of unfunded tax cuts hammered the pound sterling, raised borrowing costs for the government and attracted criticism from the International Monetary Fund.

Personal income tax rate sops are seen by industry watchers as a consumption-boosting measure, as businesses tend to make fresh investments when their capacity utilization crosses a threshold which gives them confidence about future orders.

However, the war in Europe and the coordinated monetary policy action by several central banks to fight inflation has posed uncertainties to economic growth globally and to recovery in private investments in India.

This gives rise to an expectation that consumption as a growth engine may get more policy push.

Sanjiv Bajaj, chairman and managing director of Bajaj Finserv and president of lobby group Confederation of Indian Industry (CII), said in a statement on Saturday that the government should contemplate a reduction in the rates of personal income tax in its next push for reform, as this would increase disposable incomes and revive the demand cycle.

The industry group stressed the need for “revitalizing investment as well as consumer demand to infuse vibrancy in the economy."

An email sent to the finance ministry seeking comments for the story on 16 November remained unanswered till press time.

Inflation control can happen when monetary and fiscal policies address the issue together, said Devendra Kumar Pant, chief economist at India Ratings and Research (Fitch Group).

Official data for September showed that non-food credit to industry remained robust.

Credit to industry rose 12.6% against a 1.7% growth a year ago, while credit to large industry accelerated 7.9% against a contraction of 2.1% a year ago.

Medium industries recorded credit growth of 36.2% in September, nearly steady as the 37.1% seen the same month last year, while credit to micro and small industries rose 27.1% compared with 13.1% same time a year ago, the Reserve Bank said in a statement earlier this month.

India is finally seeing healthy signs of credit offtake to the micro, small and medium enterprises (MSME) sector after two consecutive years of low disbursal, said Sanjay Sharma, founder and managing director of non-bank finance company Aye Finance.

He said his business’ disbursals have been going up every quarter in the current fiscal year.

“After the pandemic, when they are rebuilding their business, the need for adequate funds for running their operations is pushing up the demand," he explained.

Pant of India Ratings said that sectors, such as infrastructure and electric vehicles, are now seeing good investment demand.

“However, for a sharp and sustained pickup in overall investment demand, a strong demand growth is crucial," he said.

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