Around 70 per cent of the Indian population lives in the rural areas and 22 per cent of the population falls below the poverty line. In this scenario, it becomes difficult for any government to satisfy all stratas of society. The government’s role has been to act as Robin Hood — to take money from the rich and pass it on to the poor.
But over the years, this strategy has not yielded fruits as income inequality has widened. The economy is consumption-driven and, to achieve the target of $5 trillion by 2025, consumption growth will play a significant role. The proposals in the Union Budget 2020-21 received mixed responses. Here is a look at the different perspectives.
The proposal to increase the minimum public shareholding from 25 per cent to 35 per cent in the listed companies would hurt their share prices, and the MNCs listed on Indian stock exchanges may also take a step back. At this time of structural slowdown and serious job woes, no specific move was announced to tackle this pain point.
Allocation to the health sector was 10 per cent higher than the previous year but is still far below the target of spending 2.5 per cent of GDP on the healthcare sector. The fiscal deficit target of 3.3 per cent for the current fiscal year was set but could not be achieved as the tax collection targets were not met.
Tax slabs, removal of DDT
The Budget tacitly admits that there is little room for expenditure in this slowdown, forced by falling receipts. Finance Minister Nirmala Sitharaman aimed to reduce personal income tax, which will give the middle-class more money to spend, thereby boosting demand, but there is not going to be any substantial benefit to any income class.
A person earning ₹15 lakh per year and claiming all the deductions except the interest paid on house property will gain ₹7,500 under the new regime. All the other people will continue to follow the old system to get benefits. The new income slabs introduced have removed all the exemptions but the government has retained the old taxation regime as well — and people are allowed to choose between the two.
The removal of dividend distribution tax (DDT) will lead to higher taxation in the hands of investors but the government has put a floor of ₹1 lakh, below which no dividend is taxable. At the Nifty’s current dividend yield of 1.3 per cent, investors will require approximately ₹77 lakh investment in shares to be eligible to pay taxes on dividends. The disposable income of the lower and the middle classes will increase due to this measure. The companies will increase their dividend payout, which will ultimately increase the income of the shareholders, and as per the marginal propensity to consume, people will increase their consumption with an increase in income, though at a diminishing rate.
In a way, though this Budget aims to increase the money in people’s hands, thereby increasing demand and pulling the economy out of this structural slowdown, it remains to be seen if this objective will be achieved.
(The writers are Second Year MBA students at IIM Shillong.)