UK not prepared for increase in net migration figures

The publication of the UK net migration...

Sterling Tools scrip may give 25% return in next one year

Sterling Tools Ltd is the second largest...

Urgent stimulus needed to ramp up growth post Covid wave-2

BusinessUrgent stimulus needed to ramp up growth post Covid wave-2

Focus on driving consumption, industrial growth and large-scale employment.

The Indian economy functioned stronger than predicted in 2020 in the wake of the Covid-19 pandemic. As a result, nominal Gross Domestic Product (GDP) grew to INR 197.5 lakh crore, a contraction of 3% from the 2019-20 GDP of INR 203.5 lakh crore. In terms of real GDP, the contraction was 7.3%.
Interestingly, the Q4 FY’21 GDP in real terms showed an increase of 1.6% compared to Q4 of FY’20, demonstrating that the economy picked up towards March—corroborated by an all-time high in GST collections of INR 1.41 lakh crore in March 2021.
Unfortunately, the second pandemic wave hit India at that time. A slew of state-wise lockdowns was announced—stunting economic growth and recovery, shutting down businesses and causing another wave of reverse migration. Q1 of FY’22 will record lower growth than expected, and the economy may only recover substantially from July.
Economic growth for FY’22 was estimated as 10-12.5% in real terms; this may downshift to 9.5-10.5%. Achieving positive growth in a pandemic year is only possible if the lockdown effects are countered with urgent policy action to stimulate the economy via consumption, industrial growth, and large-scale employment. Private consumption expenditure fell from INR 123 lakh crore (60.5% of GDP) in FY’20 to INR 116 lakh crore (58.6% of GDP) in FY’21. It will fall further this year if the government does not offer incentives for increasing personal consumption.
We urge the government to consider an economic stimulus package as follows:

1. Automobile sector: The auto sector makes up 42% of manufacturing. There is a need to incentivise consumption to compensate for the down Q1 quarter. It is suggested to waive the Compensation Cess (CC) part of GST on the sale of all automobile products for three months starting July 1st. Total CC is INR 9,000 crore per month, of which share of the auto sector may be INR 5,000 crore. A 3-month waiver may amount to INR 15,000 crore, which the Centre will need to compensate to states.
Assuming a 20% increase in consumption due to the stimulus, the net cost of the stimulus may amount to INR 10,000 crore. Better to forego the cess than face the alternative of declining sales and GST collections, and manufacturing workers losing jobs as cost-cutting measures kick in.
2. Public transport: Incentivise purchase of 50,000 electric buses for public transportation by State Road Transport Corporations, of which 25,000 will replace old vehicles. An INR 15 lakh/bus incentive, excluding the battery cost, could take care of 50-60% of the bus cost. The battery could be taken on an operational lease and compensated via the savings in fuel. This program will lead to newer vehicles, lesser pollution, job creation in manufacturing, and drive the rise of a new industry in India. Other downstream effects include having an all-electric bus fleet by 2025 and boosting the battery manufacturing sector under the Production Linked Incentive (PLI) scheme. Tata Power is installing EV charging stations across the country, and the time is ripe to drive the ecosystem. A total cost of INR 7,500 crore (INR 15 lakh/bus x 50,000 buses), of which INR 5,000 crore could be spent this year to boost the sector immediately. The increase in sales and GST could recoup INR 2,000 crore.
3. Real estate and housing: Mumbai reduced registration charges on real estate purchases from 6% to 3% for six months till March 31st. The experiment was a success–INR 60,000+ crore in sales with an inflow of capital into real estate/construction companies, fewer non-performing assets (NPAs), increased income to the government and new cycles of investment. India reportedly has INR 5 lakh crore worth of unsold housing stock.
The government can incentivise states to follow Mumbai’s example of reducing registration charges from 6% to 3% for six months from July 1st to December 31st 2021 by reimbursing states 50% of the reduced revenue.
Assuming INR 2 lakh crore worth of housing gets sold with this incentive, the revenue loss amounts to INR 6,000 crore–50% incentive is INR 3,000 crore. This move will recapitalise the real estate industry, create a boom in the housing market, and incentivise household investment and savings.

India has over 7,500 census towns, which can serve as the country’s next growth engine. It is suggested to develop 2,000 of these towns all over India with industrial complexes, housing, and connected with world-class infrastructure. The Centre can allot INR 10 crore per town to states, and states can spend an additional INR 10 crore per town to develop roads, lighting, sewage, water and other infrastructure as part of their urban renewal policies. The Centre’s budget will amount to INR 20,000 crore–of which INR 10,000 crore can come from the road cess from fuel and the balance from a stimulus package.

India finds it difficult to compete in labour-intensive industry markets because most of these industries are located in high living-cost locations–driving the production costs unnecessarily high.
Instead, if these industries relocate to rural areas—particularly near the 2,000 towns discussed above—labour costs will decrease dramatically, making it more competitive to produce in India. 250 districts across India can be deemed Special Industry Zones linked to the 2,000 towns. It is advantageous to locate these industrial complex towns in districts that today see significant emigration due to lack of growth opportunities, particularly in labour surplus states like Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh.
Industrialists that set up industries in these 250 districts and provide employment as part of this program can be incentivised with an income tax deduction of 150% for jobs created for 10 years.
Contributions to the EPFO and ESI schemes can be held as evidence of the salaries paid. Assuming these new industries successfully ramp up to total sales of INR 5 lakh crore a year, the wages component could be 60%—amounting to INR 3 lakh crore. At an average wage of INR 2 lakh per year per employee, these industries could provide 1.5 crore jobs a year when fully utilised.
Labour-intensive industries have low pre-tax profits of around 10%. So the IT benefit will be INR 7,500 crore a year at best (new industries pay only 15% IT on pre-tax income today). This benefit will pay for itself in terms of increased tax on consumption. If this program starts this year, the government may need to spend INR 2,000 crore as part of the stimulus package.

The pandemic has clearly shown India the gaps in its healthcare infrastructure. The country needs a fully equipped multidisciplinary tertiary hospital in every district, primary healthcare centres in every taluk, and rapid brownfield expansion of colleges to train the required 1.5 lakh doctors and 2.5 lakh nurses every year. A nine-point framework to Transform India’s Healthcare System was published on The Sunday Guardian on May 15th 2021. The investment towards this can come from the health budget. In FY’22, INR 35,000 crore and INR 60,000 crore have been allocated for the vaccine and water programs, respectively. On completion of these programs over the next two years, the government can direct these budgets towards increasing the healthcare install base in India. This year, the Centre could allocate INR 10,000 towards starting this process.

1. Income tax: The middle class and IT payers have significantly suffered during the pandemic, with a sudden increase in health expenses and inadequate relief from the government in the first wave. This year, it is suggested to simplify the tax slabs – no tax up to INR 5 lakh of income, 10% on INR 5-10 lakh, 20% on INR 10-15 lakh, and 30% plus surcharges on INR 15+ lakh incomes. Section 80 deductions for expenditure like housing and insurance will not be applicable in this system. The new slab system will help those in the lower slabs, those of age 55+ and retirees. The loss of revenue will be minimal since the S80 deduction no longer pertains but will increase cash in hand for consumption and generate a feel-good factor.
2. Capital gains tax (CGT): It is suggested to reduce CGT on unlisted stock to 10% plus a 15% surcharge, just as it is for listed stock. This move will incentivise domestic investment and job creation from FY’22. The holding period on unlisted stock could be three years instead of two. Today, the CGT on unlisted stock is 20% plus a surcharge of up to 38% – an unnecessarily high tax on stock that is much riskier than listed stock – and a major deterrent to attracting more Indian capital into the technology innovation and startup ecosystems. Hardly 10% of incoming capital into this system is domestic. Allowing this to continue by taxing Indian investors at the 20% rate will result in India becoming a digital colony, at the mercy of supermassive global tech conglomerates like Facebook, Google and Twitter. The total tax from CGT is hardly 2.5% of total collections – this move will not hurt much in the near term, and will result in a whole new investment rush in India, leading to a step-function in growth, job creation and long-term tax collections.
3. 80G deductions: Government can increase 80G deductions for charitable donations by individuals to 25% of gross income for FY’22. From the end of FY’20, taxpayers have made large donations towards pandemic relief. The government must recognise this and repay in kind.

India may lose 4 lakh people to Covid-19 this year. Just like the government dispenses compensation for deaths due to natural disaster, there is a need to compensate the families of Covid-19 victims as well. At INR 2 lakh per death, the government can allot INR 8,000 crore as part of pandemic relief to provide financial assistance to these families.

Suggested sources
1. Extra dividend from the Reserve Bank of India: While the budgeted dividend was INR 60,000, the government received INR 99,000 crore. The additional INR 39,000 crore can be channelled towards the economic stimulus package.
2. Savings in food subsidy: Government can direct the INR 40,000 crore savings in food subsidy prepaid last year towards boosting the economy.
Despite the fallout of the second pandemic wave, there is still room to stimulate the economy. Much depends on the government taking the necessary steps to provide a stimulus package to drive consumption up in auto sales and housing and boost the manufacturing sector and job opportunities. Internal consumption is a crucial lever of Indian economic growth. Therefore, it is imperative to keep that at the heart of any economic relief measures.
T.V. Mohandas Pai (Chairman, Aarin Capital) and Nisha Holla (Technology Fellow, C-CAMP)

Check out our other content

Check out other tags:

Most Popular Articles