Tax Relief Will Have “Very Limited” Impact on Demand and Growth

1 day ago 7

Tax relief will have "very limited" impact on demand and growth: former Chief Statistician, Pronab Sen, to Karan Thapar for The Wire. .......................................... The budget’s unprecedented income tax relief, which the government seems very proud of and which most commentators believe will boost demand and growth, could actually have “very limited” impact on both and GDP growth next year is likely to be in the range of 6 to 6.5% and not higher. This is the considered opinion of India’s former Chief Statistician, Pronab Sen, who is presently the Country Director of the International Growth Centre. He said the impact on growth of the unprecedented tax relief will be “very limited”. Prof. Sen believes that the 31 million income tax payers who would benefit from the tax relief are “elite” and cannot really be considered middle class. He believes the income tax relief will increase inequalities whilst also suppressing, to some extent, the upward mobility of those at the lower end of the social scale because social expenditure has been suppressed or cut. Prof. Sen adds that it’s possible that the very rich could use their tax relief to buy imports, either directly or by increasing their patronage of restaurants and other services with large import components. This is a fairly comprehensive interview that examines in some detail the whole subject of the unprecedented income tax relief (it’s likely consequences, whether it’s too large, whether it’s good politics but not good economics, whether it will be nullified or diminished by the Trump effect) as well as other aspects of the budget (agriculture, MSMEs, investments, jobs) as well as the question of Viksit Bharat. Rather than paraphrase or precis what Prof. Sen has said, I think you should watch the interview to hear him yourself. To help you I will give you the questions asked so that you know what to expect. I should point out they are not asked in the order in which they appear below. Here they are: 1) Let’s first focus on the part of the budget that’s attracted most attention – the unprecedented income tax relief. It’s been presented as a reward to the middle class. But given that only 8 crore file income tax returns of which only 3.1 crore actually pay tax is this a benefit for the middle class or the elite? 2) The second question is will these 31 million people spend their tax bonanza, save it or use it to re-pay loans like EMI and gold loans? Won’t that affect the impact on the economy? 3) Third, even if they do spend the entire tax bonanza what will be the impact on consumption and growth? Mihir Sharma writing in the Business Standard says: “Long-term studies in the US … have found ‘little evidence that tax cuts or tax reforms since 1980 have impacted the long-term growth rate significantly’.” So what do you expect will be the impact on India’s growth? 4) Prasanjit Bose, writing in The Hindu (3/2), says that the 3.1 crore who get income tax relief are approximately 25% of the salaried workforce. What about the remaining 75%? The Economic Survey says that between 2017-2018 and 2024-2025 real monthly wages of self-employed workers fell 9.1% and those of salaried workers 6.4%. This cohort have not only seen their salaries fall but they still face inflation of 5.2% and food inflation of 8.3%. In the circumstances their consumption and demand is more likely to shrink than grow. 5) And what about the rest of the country’s 1.4 billion population? Can tax relief for 31 million in any way boost their consumption and demand? 6) Let’s come to two further questions about the tax relief. First, both Swaminathan Aiyar and Rathin Roy have pointed out that the 12 lakh tax exemption limit is five times greater than per capita income. In the US, where the per capita income is $82,000, the tax exemption limit is just one-sixth of that i.e. $14,600. In Pakistan, it’s just 1.87 lakhs, which is one-seventh of India’s rate. So has Mrs. Sitharaman put the tax exemption limit too high? 7) Second, at a time when economists are concerned about expanding the tax base, by raising the exemption limit from 7 lakhs to 12 lakhs this government has contracted the tax base very substantially. Now one crore people will cease paying tax reducing tax payers to 2.1 crore. Swaminathan Aiyar writes (ET 2/2): “This may be good politics but not good economics”. Do you agree? 8) Finally, will what’s called the Trump effect nullify or, at least, diminish the beneficial impact of the tax relief? Join The Wire's Youtube Membership and get exclusive content, member-only emojis, live interaction with The Wire's founders, editors and reporters and much more. Memberships to The Wire Crew start at Rs 89/month. https://www.youtube.com/channel/UChWtJey46brNr7qHQpN6KLQ/join

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