The Centre hopes that its consumption boost in the form of lower income tax will make India Inc loosen its purse strings
If India’s Budget for the upcoming financial year has a unifying theme, it is that the government wants the private sector to usher in the next phase of growth for the world’s fifth-largest economy. This comes after years of government capital expenditure (capex) pushing up growth.
The Centre, though, is keen to help businesses make the transition. Its decision to slash personal income tax (under the new regime) is meant to boost consumer demand, whose sluggishness was making companies anxious about shoring up investments.
The tax break will effectively mean that individuals with annual incomes of up to Rs 12.75 lakh will not have to pay a tax on their incomes. Those above this tax bracket will also see a reduction in taxes.
Corporate earnings reached a 15-year peak the previous financial year. Yet, companies have been wary of raising their investments
The move not only placates the salaried classes, it is also expected to substantially increase deposits in banks which can then be used to extend credit to companies.
And as the government lets go of nearly Rs 1 lakh crore in revenue, around 0.3% of India’s GDP, it has cut down its capex from the expected Rs 11.11 lakh crore to Rs 10.18 lakh crore.
Government sources say the reduction in capital expenditure is not only because of the Centre’s focus on fiscal consolidation (the government wants to target 4.4% fiscal deficit reduced from a projected 4.8%) but also to cede space to the private sector.
Manoj Govil, the secretary for expenditure at the finance ministry, sees this as a return to normal after the government had to increase its capex substantially in the years following the pandemic.
In the annual Economic Survey published a day before the Budget, Chief Economic Adviser (CEA) V Anantha Nageswaran reiterated his call to Indian companies to step up investment, innovation and job creation.
The CEA had made the same call in the 2024 Economic Survey, but evidently, the call had fallen on deaf ears. This year, the call is louder.
Over the past two decades, the profit-to-GDP ratio of Nifty 500 firms has doubled. Corporate earnings reached a 15-year peak the previous financial year. Yet, companies have been wary of raising their investments.
Will the boost to consumption be enough to unleash animal spirits? Harsh Vardhan Agarwal, president of trade body Ficci, thinks it will. “The Budget proposals will re-energise the economy by lifting the sentiments of the middle class and nudging the private sector to advance its investment plans as demand improves,” he says.
The government has done its part by reducing taxes. It is up to India’s private sector to lead the growth from this point forward.