Maintaining a Balance Between Macro and Micro Economics

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By Vikas Vasal

India is expected to account for a $3.2 trillion economy in the financial year 2021-22. It took us about 60 years after independence to reach the first trillion dollars, then about ten years to reach $2 trillion, and even less time to cross the coveted $3 trillion mark. It undoubtedly raises hopes and aspirations that with continued political reforms and barring a geopolitical accident, it is only a matter of time when India will become a $10 trillion economy.

It is undeniable that over the past two decades, India has witnessed phenomenal growth on most metrics, lifting millions of people out of abject poverty and becoming almost self-sufficient in many sectors/industries. Of course, there is still much to do in the areas of health, education and more immaterial aspects.

The ongoing pandemic has wreaked havoc on the economy and its constituents. Although the economy has come out stronger this year, there is still a lot of pain in many pockets. Overall, the organized sector and large corporations have been able to realign their business models and gain market share. A classic example is India’s IT and IT sector, which has seen a rapid increase in demand due to digitalization, both in India and abroad. At the same time, MSMEs and the unorganized sector have borne the brunt of the pandemic.

A visit to your local neighborhood market has telltale signs of the financial stress that small restaurants, stores and the millions of employees still face there. A refund of, say, 50% of the GST paid by these small businesses over the past two years to support and encourage businesses still on the fence to fully embrace the GST system?

The increased and easier availability of credit across the world has added to the meteoric rise of stock markets and the emergence of new asset and investment classes that have gained popularity in the form of cryptocurrencies. and NFTs. This is now a source of concern for policy makers and central banks regarding the adjustments to be made to monetary policies – when, how and how much? Now is probably a good time to clarify the tax treatment of cryptocurrencies and related asset classes in this year’s budget, bring clarity and increase revenue collection. Otherwise, a plethora of disputes and litigation are likely to follow.

Although the budget is and should be an annual statement of countries’ financial parameters, in the context of India, it is also an important political statement that defines the direction in which the current political establishment is likely to move forward. ‘to evolve. This has a significant impact on the general mood and sentiment of the economy. Although it has been found that there is often a disconnect between policy intent and its implementation on the ground, a good example is the asset divestment/monetization program. Nevertheless, it gives the directional message and creates a lot of economic activity in anticipation of itself. Therefore, it would be good to continue and push the announcements made earlier on various initiatives like IPL and monetizing assets with renewed vigor and assurance.

This year’s budget should strike the right balance between Macroeconomics and its micro-components, without each other, could lead to significant challenges in the short and medium term. Thus, it will have to strike the right balance between strategic long-term growth in terms of capital formation and the strengthening of supply-side infrastructure on the one hand, and continue to stimulate demand through public spending, leaving more money in the hands of households. , and ensure easier availability of credit. At the same time, it should be ensured that sufficient fiscal and monetary safeguards are in place to contain consumer price inflation.

Although there are arguments for and against, the focus should be on containing the budget deficit in the short term. It is a fact that unprecedented situations call for unconventional solutions. Therefore, a small pause and some easing on the budget deficit would be completely understandable. Moreover, India will not be an exception to this, globally.

It is expected that the Federal Reserve in the United States is likely to tighten the interest rate regime, due to unprecedented inflation there, compared to the last four decades. This should be followed by other central banks in the EU and other parts of the world. In India, RBI may also need to act in sync to ensure that it does not cause a major imbalance in the economy, although it may go a little slowly, and continue to maintain its dovish stance for a while. some time until businesses, especially MSMEs start to recover.

Despite the various economic constraints, the government is expected to resist the introduction of new taxes or surcharges this year. Discussions of inheritance tax, wealth tax, inheritance tax, etc. require a change of mentality and the search for a consensus in society. Likewise, any new surtax will only increase the burden on the masses because ultimately the cost of goods and services increases after a certain delay, as it is passed on by industry to consumers.

Leaving more money in the hands of households by reducing their effective tax burden, either by increasing slab rates or reducing overall tax rates. Households would spend it either on goods and services or by investing. Both are good for stimulating the economy. The current top tax rate of around 43% for individuals above a certain threshold is quite high. We are said to be a “trust deficit” society, and any increase in these taxes only compounds the tax planning problems that often rely on tax avoidance and encourage the immigration of the wealthy to other jurisdictions. tax.

The reduction of corporate tax rates for new manufacturing companies to 15% and for others without tax benefits to 22% has been widely welcomed and boosted the business climate. It’s probably time to bring the effective tax rate down to 15% for everyone or at least cover new investments in services as well. Although our goal has been to stimulate the manufacturing sector, let’s not forget that it is the service sector that contributes the most to our GDP. Also, if India is known today in the world it is for its service prowess. Be creative and act quickly on the asset monetization program to make up for any lost revenue. There are enough roads, railways, ports, airports and businesses that can get rid of the government tag and add value creation in the economy.

In any event, revenues from direct taxes and the GST are on the rise. Revenue-neutral measures, such as the streamlining of the TDS regime, the second stage of GST reforms and reduced compliances, are now needed to improve the ease of doing business.

We will soon reach the goal of 10 trillion dollars; the question is how fast. After all, India needs to grow and prosper, not only to become a wealthy society, but also to ensure that every household is able to live a life of financial dignity and realize their dream of decent meals. for the family, a roof over their heads and quality education for the children. So, the faster India grows, the sooner this mission would be accomplished. So let this budget be the harbinger of pragmatic, inclusive and all-out growth and development.

(Vikas Vasal, Country Managing Partner – Tax, Grant Thornton Bharat.)

(Sunsclaimer: the opinions expressed in this column are those of the author. The facts and opinions expressed here do not reflect the views of www.timesnownews.com.)

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