In economy's shifting sands, a budget to boost demand
Subscribe to enjoy similar stories. The Union budget presented by finance minister Nirmala Sitharaman on Saturday can be framed against two major shifts in the Indian economy. First, the splendid economic recovery after the pandemic shock has begun to lose steam.
Consumer spending in cities has been especially weak as a result of anaemic growth in labour incomes other than at the very top of the income pyramid. Meanwhile, corporate profits have soared. Companies sitting on piles of cash are not keen to invest in new capacity unless they see robust demand from fatigued consumers.
The income tax cuts that have been announced will leave more money with households, around ₹1 trillion according to the finance minister. That is around 0.3% of India's gross domestic product (GDP). The tax relief is an attempt to support weakening consumer spending, and hence hopefully stimulate wider economic activity.
Yet, personal income tax will continue to contribute more to the government exchequer than corporate tax. This was not the case before the pandemic. The latest budget numbers show that income tax is expected to account for ₹22 out of every ₹100 of receipts that will flow into the government treasury.
Corporate tax will contribute ₹17. The second major shift: In February 2021, the finance minister had announced a plan to gradually bring down the fiscal deficit of the Union government over five years, so that public finances could be repaired without harming economic recovery through a dramatic fiscal contraction. The government has credibly met its promise, with fiscal deficit expected to be 4.4% of GDP in 2025-26.
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