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Informist, Sunday, Feb. 2, 2025

 

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--Fin secy: Chose tax cut over revenue spending as it is non-inflationary
--Fin secy: Took non-inflationary tax cut route as we want RBI to cut rates 
--Fin secy: FY26 income tax cut to spur consumption, savings, investments
--CONTEXT: Finance Secretary Pandey's comments in interview with Informist
--Fin secy: FY26 income tax cut to also boost private capex across sectors
--Fin secy: Govt capex can spur private investment in limited sectors
--Fin secy:Anticipation of savings from tax cut to boost demand from Jan-Mar
--Fin secy: FY25 growth may also get support from demand due to tax cut 
--Fin secy: 16th Finance Commission to give road map for states to cut debt

 

By Priyasmita Dutta, Sagar Sen and Krity Ambey

 

NEW DELHI – The Union Budget for 2025-26 (Apr-Mar) tried to offer much-needed impetus to the economy through a "non-inflationary" route of cutting income tax, rather than more revenue expenditure in a bid to give room to the Reserve Bank of India to lower interest rates, Finance Secretary Tuhin Kanta Pandey said. "Reduction of rates is a very important instrument to spur demand and investment. In our assessment, this is a very good way to lift the spirits," Pandey told Informist in a post-Budget interview on Sunday.

 

The central bank's rate-setting panel is set to meet on Wed-Fri. 

 

The RBI's Monetary Policy Committee has stood pat on interest rates since April 2023 as high food prices have made it difficult for the headline inflation print to align with the target of 4%. In the meanwhile, many experts have attributed the slowdown in the economy – which is expected to grow at a four-year low of 6.4% in FY25 – partly to tight monetary conditions. 

 

"If the interest rate is reduced, the equated monthly instalment gets reduced, people who are taking loans from the bank increase," Pandey said. "Capex and other things are critically dependent on what the rate of interest is in the economy," he added. 

 

One of the key takeaways from Finance Minister Nirmala Sitharaman's eighth Budget speech presented on Saturday was the hike in the tax rebate limit to INR 1.2 million, effectively meaning that individuals with income of up to INR 1.2 million per year will be entirely exempted from paying income tax. This move was aimed at increasing disposable income in the hands of taxpayers to spur demand. 

 

Had the government taken the revenue expenditure route to boost demand, its inflationary nature would have been "counterproductive" as "the government wants the RBI to reduce rates and RBI must see the impact on inflation", Pandey said. If the fiscal policy were to be inflationary, "we will not be seeing the reduction of rates", he said. 

 

To be fair, the increase in the much-talked about consumption demand is seen at 7.3% in FY25, according to the first advance estimate by the statistics ministry, higher than the other levers of growth. But experts remain unimpressed as urban consumption remains weak, which is also reflected in corporate earnings over the last two quarters at least. Multiple fast moving consumer goods companies have said that slowing urban demand has hit their sales and profits. 

 

The government's support in this case could come from two routes – public spending, and income tax cuts, the finance secretary explained. While the income tax cut made headlines on Saturday, a few experts had their doubts about its effectiveness, since the capital expenditure multiplier is considered higher. Pandey said the government's public spending thrust would continue, and along with that, the income tax cut would give multipliers in "a mix of consumption and investment", contingent on how the taxpayer spends the money.

 

"When the government puts more money in the hands of taxpayers, instantaneously they have the money to decide and put it in a wide range of goods. This may be a superior way of triggering demand than the way it is from the government, more widespread," he said. The three key areas of depositing that money are on consumable goods, in the form of bank savings and household investments. "The choice is getting shifted on that money from the government to taxpayers," he said. "Irrespective of the choice, we are good."

 

The proposed income tax benefit will kick-start from FY26, but according to the finance secretary, the "perceptional" tax benefit could lead to a "pretty fast" private investment cycle. To that extent, he said the anticipated disposable income could lead to a spurt in spending "right away", which would aid the top line growth of companies in Jan-Mar itself. "If taxpayers believe that their disposable income is surely going to rise next month, they can start spending right away," he said.

 

STATES' DEBT

Beyond growth impetus, the Budget for FY26 also detailed a fiscal glide path in adherence to the Centre's plan to cut the debt-to-GDP ratio. Taking a cue, state governments are also expected to follow the Centre's lead. The Sixteenth Finance Commission, in its report, will delineate a road map for states to cut their debt-to-GSDP ratio, Pandey said.

 

In the Budget for FY26, the central government announced a glide path that it will follow to reduce its debt-to-GDP ratio to 50.0% in a band of 49-51% by FY31 from 57.1% in FY25. However, India's general government debt-to-GDP ratio, which factors in states' debt as well, is close to 80%.

 

"They (states) will be doing it (cutting their debt level) only when the Finance Commission finishes their report," Pandey said. "The Finance Commission is, right now, seized of the matter."

 

The Sixteenth Finance Commission, which will submit its report by Oct. 31, will outline the distribution of net proceeds of taxes between the Centre and states and the grants-in-aid to be paid to states for five years starting Apr. 1, 2026.  End

 

 

Edited by Avishek Dutta

 

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