Context:
After a few years, the government would bring in an income tax cut as the strategy for consumption and growth. Now, though still seeing high capex spends, they are flat lined; thus, this is exactly where a tax cut would have to spur consumption and help reflate private investments.
Proposed Tax Cut
- The income tax cut suggested is about ₹1 trillion, which is around 0.3% of GDP, targeting 47 million urban taxpayers.
- Tax multiplier effect may be less than direct government spending, particularly with a consumption propensity of 0.8.
- There could be inflationary pressures if the tax cut induces higher demand for supply-constrained food items and complicates monetary policy.
Private Investment and Corporate Sector
- Private investment has been slow even though FY24 saw record profits because the said items have been underutilized and consequently lower labor costs rather than higher sales.
- A shift from relying solely on capex to including tax cuts for boosting consumption is seen as a potential strategy of enhancing capacity utilization.
- The corporate tax cut of 2019 did not stimulate enough investment, and at that time an income tax cut for the middle class would have worked better, argued some.
Regulatory and Investment Issues
- As private investment is obstructed by the overregulated economy, as noted by the Economic Survey, the latter advocates a trust based regulatory system.
- A new committee SCORE is called to be provided in deregulation; but then this would also not produce immediate results.
R&D Focus
- Improving private sector R&D in India is back in focus since there is much public R&D spending that is unused.
- An R&D fund to create better coordination between institutes of public and universities and the private sector
Agriculture and Tourism
- It examines agricultural production rising: more fruits, vegetables, and pulses to deal with the challenges in prices.
- Tourism infrastructure and medical tourism have been attempted as means of exploiting some of India’s untapped tourism potential.
- Import Tariff Cuts
- The government is cutting import tariffs on some items such as motorcycles, smartphones, and EV batteries. This will enhance competitiveness and address the inverted duty structure.
- Defence Expenditure Issues
- Defense spending is one of the cause of concern, since pensions and wages take in much of the budget, making it impossible for much capital to be invested on modern equipment.
Public Debt and Fiscal Deficit
- Fiscal deficit is going to come down to 4.4 percent of GDP FY26, however public debt will continue to haunt at 84.3% of GDP.
- Debt repayment and interest payments make up a huge chunk of government spending, leaving little room to maneuver in the face of potential future crises.
- There is a demand for aggressive divestment to bring down public debt to around 70 percent of GDP.
