Expect Budget to leave significant money in the hands of consumers
V. Vaidyanathan February 25, 2015I expect that all the pet themes of this government - Make in India, growth, jobs, shelter, renewable energy - will reverberate through the Budget.
Rightly so, as that is why the electorate has voted this government into power and this is the first full Budget after the elections.
First, the savings ratio in the country has declined from 36.8 per cent in 2007/08 to 30 per cent in 2013/14. The household financial savings has dropped from 13 per cent in 2008/09 to 7.1 per cent in 2013/14.
This is a significant drop, and we need to once again lift savings rates to be able to sustain high investment rates for growth. Hence, I expect the Budget to increase the limit for 80C from Rs 1.5 lakh to Rs 2.5 lakh to increase incentive for long term savings.
Second, in keeping with the theme of housing for all by 2022, the Budget will continue to encourage the housing financing sector. Hence I expect the limit for deduction for housing loan interest is expected to go from Rs 2 lakh to between Rs 3 lakh and Rs 4 lakh.
Third, I am also expecting relaxation in personal income tax limit for individuals from Rs 2.5 lakh to Rs 4-5 lakh. These measures will spread all round cheer as disposable income in consumers' pockets will increase. The budget could then argue that such disposable income will boost consumption and consequently push investments back to high 30s to sustain growth.
My feeling is that this will be a positive Budget for growth, largely with benefits loaded for individuals. It will create a feel good factor by leaving money in consumer pockets. The markets will see the positive side of this development and will benefit through the cycle of demand> consumption> investment> growth> demand.
Finally, two points I would want included in the Budget though it is unlikely to happen. One, I wish that the government does away with customised exemptions and breaks, both in direct and indirect taxes, as much as possible. We levy excise based on the length of a cigarette! There are exemptions for breakfast cereals, fruit baskets etc. You get the point.
Second, I wish the Budget moves to a "Progressive Income Tax" for corporates, firms and partnerships, with starting tax rates as low as 5 per cent, and progressing gradually to 30 per cent. This will benefit millions of small entrepreneurs and address India's parallel economy.