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Informist, Thursday, Jan. 23, 2025

 

--Aditi Nayar: FY26 Budget can give some tax relief to aid urban households

--CONTEXT: Comments by ICRA's economist Aditi Nayar in an interview

--Aditi Nayar: Budget mustn't sacrifice hard-won gains in expanding tax base

--ICRA's Aditi Nayar: See FY26 capex target at INR 11.0 tln

--Aditi Nayar:Pvt capex pace may not be "excessively exuberant" next few yrs

--Aditi Nayar: Not prudent to target aggressive fiscal consolidation in FY26

 

By Priyasmita Dutta

 

NEW DELHI – Any relief to taxpayers in the Union Budget for 2025-26 (Apr-Mar) should not come at the cost of "hard-won gains" the government has accrued in widening the tax base, according to Aditi Nayar, rating agency ICRA's chief economist.

 

"The Budget may provide modest tax relief to personal income taxpayers in the form of raising tax slabs, or higher deductions, which will provide some relief to urban households," Nayar told Informist in an e-mail interview. "There is likely to be some space for modest tweaks in the income tax slabs and/or deductions, without taking a material hit in terms of the growth in income tax collections. However, the government must ensure that hard-won gains in expanding the number of taxpayers are not sacrificed."

 

Weakness in consumption, especially in urban areas, has been widely cited as a key concern for policymakers, with companies warning of demand issues for mass market goods. This led to calls for supportive measures, such as cuts in income tax rates. According to Nayar, other factors that could push consumption in FY26 is a fall in food inflation and equated monthly instalments once the Reserve Bank of India lowers the interest rates.

 

Operationalisation of previous announcements, such as the employment-linked incentive scheme and measures to enhance credit flow to micro, small, and medium enterprises would also support employment generation and contribute to consumption demand, she said. 

 

The Indian government's income tax collections have grown robustly so far in FY25. While the Budget projected a growth of 17.4% in the income tax mop-up from what was collected in FY24, Apr-Nov saw collections 23.5% higher on a year-on-year basis. Nayar sees the government estimating a 13% growth in income tax collections in FY26.

 

"Looking at long-term trends, income tax collections as a percentage of GDP have risen from around 2.0% in FY16 to 2.4% in FY20 and are expected to exceed 3.5% of GDP in FY25, driven by a widening tax base and higher compliance. This is a positive development," she added.

 

BALANCING THE NUMBERS

If some minor relief can be provided on the income tax front, the increase in capital expenditure next year may come down as the high levels of growth seen during FY21 to FY24 "are unlikely to be feasible year after year owing to fiscal constraints".

 

The Centre's capital expenditure has surged from INR 3.36 trillion in FY20 to an estimated INR 11.11 trillion this year, which Nayar thinks will be missed by around INR 1.4 trillion. For FY26, she thinks the Centre may target a capital expenditure of INR 11.0 trillion, which would support growth given the uneven urban demand and the "lacklustre" outlook for merchandise exports. A higher untied portion under the long-term, interest-free investment assistance scheme for states could also help increase utilisation levels, she added.

 

In contrast to the government's investment plans, the private sector's capital expenditure has been subdued due to "patchy" demand both domestically as well as from abroad, contributing to the first advance estimate of GDP growth in FY25 falling to a four-year low of 6.4%. And while Nayar sees capacities being increased in the medium term across several sectors such as steel, cement, commercial real estate, and data centres, among others, the pace of private capital expenditure is likely to be measured and may not be "excessively exuberant over the next few years". In such a scenario, aggressive fiscal consolidation should not be pursued.

 

"...given the macroeconomic backdrop of a downward revision in growth projections for FY25 and risks to the FY26 outlook owing to global uncertainties, it would not be prudent to budget for an aggressive fiscal consolidation in FY26 at this juncture," Nayar said, adding that the fiscal deficit target for next year should be set at 4.5% of GDP as outlined previously, with any additional space from higher revenues used to boost capital expenditure.

 

According to Nayar, a 10-basis-point reduction in fiscal deficit in FY26 would require the Centre to cut its expenditure by around INR 350 billion. For FY25, the fiscal deficit target of 4.8% is seen being undershot by 10 bps.  End

 

Edited by Akul Nishant Akhoury

 

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