Middle-class angst and the budget

Big giveaways in personal income-tax might not be possible given the state of the economy, and especially the fall in revenue receipts.

June 29, 2014 10:09 pm | Updated December 04, 2021 11:24 pm IST

The budget season is well and truly on. However, until now, the excitement has been confined largely to the stock markets and corporate board rooms. The vast middle-class, which is normally expected to be tuned in to the budget at this point in time, less than two weeks before, has remained silent, at least so far. Yet, its expectations from the Finance Minister are large.

Most of them have voted for the BJP-led NDA government and probably assume that the first budget of the new government will have a lot of goodies for them.

In what form those would come is still a matter of conjecture. Important macro-economic themes on which the elections were fought include price rise, economic growth and employment. It is almost given that the Finance Minister will have something to say in all these.

Looking at the state of the economy and its near-term prospects, can any section, including the middle-class, expect fiscal munificence? Big giveaways in personal income-tax might not be possible given the state of the economy, and especially the fall in revenue receipts. Nor would they be, according to some experts, desirable.

Cynical view A cynical view is that the BJP, having just won the elections, can afford to wait and distribute financial largesse at some future dates when another election is round the corner.

One school of thought holds the view that even in an economic sense there is not much justification.

The two important areas where the government can please the middle-class is (a) raise the income-tax exemption limit and (b) the 80 C exemption limit. There has been a talk of raising the former to as much as Rs.5 lakh. For several years now, there has been a clamour to raise 80 C ceiling by at least another Rs.50,000 to Rs.1.5 lakh.

Leading tax experts argue that there is no justification for such a largesse. Over the past 10 years, the increase in income-tax exemption limits (and the levels at which peak rates apply) have been well above the increase in consumer price index. This suggests that the government of the day has been alive to the needs of the salaried class.

The further argument that raising the income-tax exemption limits per se does not cause a fall in revenue might be valid. But the counter argument is that the fall in the number of taxpayers would go against the much needed long-term goal of widening the tax base.

Sec. 80 C exemptions are in for a major overhaul when direct tax reform through the DTC is taken up. There might be a minor hike in the overall limit this year. Medical insurance and interest on housing loans might receive greater attention. But a very large hike in the Sec. 80 C limits might not figure in this budget. There is a third item in the wish-list of the salaried-middle-class: restore the standard deduction that was in vogue until a few years ago. This proposal might not pass muster this time.

This is not to suggest that those who clamour for reliefs do not have a case at all. The middle-class forever groaning under the burden of price rise would be extremely disappointed if there are no major concessions.

For most middle-class income earners, Sec. 80 C savings are the only practicable avenues to save. The government will be aware of all this but for this budget the accent will be on reviving growth by all possible means. Concessions to the salaried class, however well deserved, will go against the grain of this year’s budget philosophy.

One point very material to this discourse is the fact that very soon after taking office, Narendra Modi and his senior ministers have been trying to moderate expectations. Not just through statements but even by concrete actions such as railway tariff hikes the government has been preparing the ground for a tough budget.

The need to proceed with fiscal consolidation has been stressed more than once. A contingency plan to tackle impending drought will cost a lot of money. The NDA is committed to reviving the growth process. Banks need a lot of money to augment their capital.

Realistically, apart from some marginal tinkering with exemptions limits, Sec. 80 C exemptions and so on, the NDA government will be doing a service if it can revive interest in some of the existing schemes by making them investor-friendly. For instance, it can, in conjunction with the Reserve Bank of India (RBI), make the CPI-linked inflation bonds a worthwhile proposition for investors. That means the bonds should offer at least a quarterly interest (it is now payable after 10 years). It should be better marketed and the yield fixation more transparent.

A big challenge for the Finance Minister would be to minimise the financial hardships of the middle class. For senior citizens, special concessions such as higher TDS exemption limits can be considered without a great loss to the exchequer.


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