Relevance: Mains: G.S paper III: Economy: Government budgeting:
Context:
- The Union Budget 2020-21 has unveiled an alternate income tax regime hoping that it will increase household disposable income and provide the much needed fillip to consumption.
• The government has provided taxpayers the option of shifting to the new regime with lower tax rates, provided they forego all their exemptions and deductions.
Background:
- As tax payers tend to take advantage of exemptions and deductions to channel part of their income towards physical and financial savings.
• This measure, while meant to incentivise consumption in the short run, may end up reducing household savings and thus the domestically available investible surplus in the economy.
• Considering the fall in the savings rate in the economy, it is surprising that the budget has chosen not to incentivise domestic savings.
Downgrading the savings:
- In an economy, savings form the pool of investible surplus. In India, the surplus savings of households are absorbed by the government and the private corporate sector.
• As per the 12th Finance Commission, the total transferable savings of the household sector were around 10 per cent of GDP, which combined with a current account deficit of 1.5 per cent, would be enough to finance the government (Centre and states) fiscal deficit of 6 per cent of GDP, fulfill the funding requirement of the private corporate sector of around 4 per cent, and of non-departmental public enterprises to the tune of 1.5 per cent.
• Over the past years, household savings in the economy have been falling, as with sluggish income growth, they have been dipped into for financing consumption, and borrowings have also increased.
• The incremental financial liabilities of households have in fact risen from Rs 3.8 lakh crore to Rs 7.65 lakh crore in 2018-19.
• Latest data also shows a decline in both gross and net (excluding financial liabilities) household financial savings in 2018-19.
Way forward:
- It is surprising that the budget chose not to incentivise household savings which could have been used for financing long-term projects.
• Perhaps the government is hopeful that the decline in domestic savings will be offset by the flow of savings from the rest of the world.
• The budget has raised the limits for foreign investment, and has offered incentives to sovereign wealth for investing in India.
• But the focus should have been to create a pool of domestic savings to finance long-term investments in infrastructure, especially at a time when the government has unveiled an ambitious infrastructure pipeline.