India is slashing taxes. It must now cut red tape

The upshot is this: When Indian interest rates do start to ease, Finance Minister Nirmala Sitharaman should make the most of the opportunity and slip in new fiscal sops for affordable and mid-market housing — a segment that has dropped 36% in just two years.

By Andy Mukherjee

The Indian middle class, and even some of its top 10 per cent earners, are now fully exempt from income taxes. Small businesses don’t expect such largesse; they just want to know when they will be free of stifling red tape.

Depending on whom you ask, Narendra Modi’s government is either being bold in raising the effective threshold for paying taxes by 1.7 times — to roughly $14,000 in annual earnings. Or it’s a tacit admission by the prime minister and his team that they have pushed consumption taxes so high that even people making five times the average adult wage are struggling to fork out income taxes. As I wrote in January, the economy is in dire need of a readjustment, and getting consumers to spend is the only way.

The $12 billion fiscal stimulus, estimated at about 0.5 per cent of private consumption, may not fully reverse the pronounced slowdown in urban spending: 37 per cent of respondents said in a recent survey that they expect quality of life to deteriorate over the next 12 months, a level of despondence not seen since Modi became prime minister in 2014.

Still, the rebate won’t hurt. Even if the recipients save a part of their unexpected bonanza, the tax relief should boost consumer sentiment, at least in the short run. With a little bit of luck, the afterglow will last until it’s safe for the Reserve Bank of India to cut interest rates and revive the economy from its slowest pace of expansion in four years.

The timeline for a monetary stimulus is difficult to predict. While stubborn domestic inflation eased to 5.2 per cent in December, it’s still well above the 4 per cent midpoint of the central bank’s target range. Besides, the rupee is weakening, and President Donald Trump’s policies on trade and immigration are clouding the outlook for US interest rates. Premature stimulus by the RBI could trigger a capital flight.

The upshot is this: When Indian interest rates do start to ease, Finance Minister Nirmala Sitharaman should make the most of the opportunity and slip in new fiscal sops for affordable and mid-market housing — a segment that has dropped 36 per cent in just two years.

A fresh property cycle that’s not limited to booming demand for luxury homes will be welcome news. For one thing, it will draw out surplus labor, which has been stuck on the farm since the pandemic, into urban construction jobs. For another, banks will be able to use the income on mortgages to absorb losses on unsecured personal loans to overburdened households.

Residential real estate alone, however, won’t be enough to revive economic growth or ensure financial stability. With the share of manufacturing in the economy at its lowest since 1960, new factory investments hold the key to boosting employment and general well-being.

Sitharaman, in her Saturday budget, cut tariffs on a number of imports, including materials and machines used for the manufacture of lithium-ion batteries. This should help a still-nascent electric-vehicle industry. More importantly, it’s an encouraging departure from the dangerous protectionism that has crept into New Delhi’s trade policy under Modi. Rather than make India self-reliant, the lurch toward autarky has left the economy even more dependent on China.

But tariffs aren’t the whole story. The showstopper, especially for smaller firms, is the country’s great unease of doing business. The most effective policies federal and state governments can embrace are ones that “give entrepreneurs and households back their time and mental bandwidth,” said the finance ministry’s own pre-budget survey of the economy. “That means rolling back regulation significantly.”

Sitharaman has heeded the counsel of her advisers and announced a high-level committee for a review of all non-financial sector regulations, certifications, licenses, and permissions. She has also promised, as early as next week, a fresh edition of the six-decade-old tax code. The new law will be “clear and direct in text with close to half of the present law, in terms of both chapters and words,” the finance minister said in her budget speech.

Still, investors should not expect much fresh thinking from a government in its 11th year. The overarching aim of the Modi administration now is to maximize its own longevity. The pull of politics was well evident in the numerous projects Sitharaman announced for the eastern state of Bihar, which is headed for crucial local elections this year.

A tax rebate will help a narrow group: Only 7 per cent of Indians even file tax returns, and most of them pay nothing or very little anyway. For a sustained boost to mass consumption, the economy needs new jobs. But who’ll create them? Overall public investment is expected to improve slightly after a sharp slowdown in the current fiscal year. But the stock market had anticipated much bigger outlays on infrastructure, especially on roads and railways.

As for encouraging private investments, a tumultuous year for the global economy may not be the right time to expect big-ticket projects from India’s corporate honchos. However, a $1.2 billion “fund of funds” for startups announced in Saturday’s budget is a splendid initiative.

But here, too, the need of the hour is simplicity. As the founder of a venture-capital firm told me, any investor who takes government money to invest in new companies should expect to get bogged down in compliance. No VC firm wants to hire someone just to manage the additional paperwork created by India’s bureaucrats. Which is why greater ease of dong business, especially for smaller enterprises struggling to navigate the country’s bewildering regulations, is more important than the tax rebate for the middle class.

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Union Budget 2025 | Nirmala Sitharaman, as Finance Minister, presented her record 8th Union Budget this time. While inflation has burnt a hole in the pockets of 'aam janata', the Modi govt gave income tax relief for those making up to Rs 12 lakh per year in salaried income. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.