COVID-19: Government should unveil larger stimulus package

ECONOMY

Topic: General Studies 2:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

COVID-19: Government should unveil larger stimulus package

Indian Union government had announced the financial package of 1.7 lakh crores. However, there were criticism that the relief measures were repackaging of existing schemes and largely insufficient.

Also, the present investment regime in India is ineffective in dealing with economic consequences of the COVID-19 crisis

Do You Know?

• The US announced a $2.2 trillion stimulus on a $20 trillion GDP base
• Malaysia has mobilised close to 18% of its GDP
• Japan has announced nearly $1 trillion stimulus package

What is the present investment regime in Indian economy? 

• Due to previous policies the entire structure has been made pro-foreign investor
• Rather than to incentivise new capital building by resident entrepreneurs it makes it difficult to proceed 

Three examples which reflect this are:

• The 2020 finance bill amendment (DDT related change) has resulted in the following scenario of effective tax rates to entrepreneurs – 
  • 48.52% (for less than Rs. 15 lakh income) to 59.41% (for more than Rs 5 crore income) 
  • But for foreigners this rate is capped at 40% and, in fact, comes down to 25.17%  for a rich wealth fund
• Infrastructure: The exceptions in section 80M results in an effective tax rate between 67.9% -71.2% – terrible for special purpose vehicles and subsidiaries created for infrastructure assets 
• Real Estate Sector: Section 43CA states that sales of less than 10% of the circle rate price will be dealt with punitive consequences. This will constrain developers from selling their flats at a discount 

Consequences of such lopsided investment regime

• Brain Drain: Indian entrepreneurs will start looking for greener pastures outside India due to lopsided taxation structure 
• Slows down the creation of infrastructure assets that are critical for nation building.
• Construction sector which was facing the issue of unsold inventory will be further burdened.
• Economic Recovery post the crisis will be difficult

Some of the suggestions to fight COVID-19 pandemic are: 

• Government needs to handhold economy by creating a stimulus of 10% of our GDP

• Interest rates need to be reduced at least 200 basis points from current levels, with additional measures to ensure that banks lend. 
• Government should ensure that all workers are paid Rs 5,000-6,000 per month by their employers during the lockdown period
• Support to Enterprises: Those employers who support their employees need to be supported and compensated through measures like tax rebates.
• State governments should receive their fund allocations so that they do not create a credit crunch. 
• Stimulate spending at an individual level, 
  • Personal income tax rates for the  Rs 20 lakh slab & above need to be reduced
  • All GST rates need to be reduced by 50%. 
  • All cesses and surcharges need to be eliminated for individual and corporate taxes. 
  • An interest-free EMI plan needs to be created for purchase of auto, domestic holidays, domestically assembled consumer goods and real estate
• New deal for Indian entrepreneurs 
  • Ease of starting up and accessing financial resources
  • Making the structure pro-domestic investor: The effective tax rate in the hands of residents be brought down- 48.52% tax needs to be reduced to 25% and 59.41% tax to 35%. 
  • Measures in financial bill that disincentivises Construction sector should be addressed

Source of the article: Economic Times

Connecting the dots:

• Impact of COVID-19 crisis on foreign investment (FDI & FPI)
• Helicopter Money