Budget 2020: Income tax cut likely on cards, slash in interest rates also expected

As the Union Budget 2020 is set to be unveiled soon, a number of measures, including a cut in personal income tax, reduction in interest rates on loans for education and agriculture, as well as aggressive push on infrastructure spending are expected to be announced.

Attempting to revive a sluggish economy, Finance Minister Nirmala Sitharaman is likely to pull out all stops to spur consumer demand and investment and set out a clear road map for achieving the ambitious target of USD 5 trillion economy by 2025.

Despite corporate tax cuts and other stimulus measures, higher FDI inflows plans to consolidate state-owned banks and monetary easing, investments have failed to pick up.

Last year in September, the government had announced a cut in corporate tax leading to speculations about a possible reduction in personal income taxes. A combination of an increase in the basic exemption limit and/or the introduction of a differentiated tax rate structure for higher incomes may be on the cards.

To cushion the impact on collections, these tweaks might be accompanied by rationalisation in tax rebates.

"The government announced a slew of stimulus measures in the last four months but consumer confidence is missing. Not many are eager to take loans to buy homes or cars fearing the worst. The feel-good factor in the economy is missing," a senior government source said.

"I think the Budget will be a feel-good Budget that will try to restore faith in the economy and spur spending and investments," the source said.

With disbursements under the PM-Kisan scheme to farmers being less than the budgeted amount, the Budget may also see measures to get states to onboard more eligible farmers under the scheme.Also, there would be announcements for sectors such as renewable energy, e-vehicle, power, affordable housing, real estate, and exports, they said.

Financial markets are expecting relief on Securities Transaction Tax (STT), Long Term Capital Gains Tax (LTCG) and removal of dividend tax.

Capital infusion in public sector banks and liquidity measures for Non-Banking Finance Companies (NBFC) may also be on the horizon.

Both the government sources and the economists felt the Budget would reaffirm the focus on infrastructure spending after the rollout of an ambitious National Infra Pipeline (NIP) in December.

Social sector schemes such as rural electrification, MGNREGA, healthcare, education and skill training may also find mention in the Budget.

However, all such measures would come at the cost of fiscal slippage.

The Economic Survey for 2019-20, released on Friday, has already laid the ground by suggesting to the government to keep the focus on reviving growth and letting go of fiscal discipline a bit.

The RBI, armed with a favourable inflation backdrop, defended slowdown risks last year with 110 basis points cut in interest rates. As it puts a brake on the easing cycle, due to an unseasonal spurt in food prices leading to above-target inflation, the ball is in the government's court to revive growth.

Sitharaman would have to do a balancing between efforts to boost growth and the need for fiscal restraint. Economists expect a slight policy tilt towards prioritising growth.

The real GDP growth is estimated to fall to an 11-year low of 5% in FY20 from 6.1% in FY19. Estimated nominal growth at 7.5% in FY20 is the lowest since 1975-76 (FY76) as per the FY12-based GDP series.

IIP growth turned positive but remained low at 1.8% in November 2019 after contracting by (-) 4% in October 2019.

CPI inflation increased to a 65-month high of 7.4% in December 2019, its fifth sequential rise, mainly due to persistently rising vegetable prices.

Also, growth in bank credit fell to a 25-month low of 8% in November 2019.