ast year’s budget was aimed at reviving investment. But corporate India failed to deliver. The score of 10/10 for the budget failed to translate into an investment boom. And not surprisingly, among the most important reasons cited for low investment was the shortage of demand.
So this year Mr Sinha might do well to pin his hopes on India’s middle class. And, why not? If anything has prevented the US economy from slipping into an even deeper recession, it is consumer demand.
Since the monsoon failed to deliver the higher consumer demand that industry was hoping for, even if the finance minister is not particularly worried about the fate of the middle class, he would do well even to look at it as a tool to raise demand for industry. The two things that he might want to change are income tax and interest rates.
Reductions in income tax rates with a view to increasing income available for consumption spending may be desirable. But considering this year’s budget deficit it may be a little untimely to expect the finance minister to reduce I-T rates.
The need to reduce government spending on interest payments and the pressure from business to lower interest rates may mean Mr Sinha may cut interest rates on the Public Provident Fund again this year.
This will reduce interest income of households. But the growing availability of consumer loans means that this could be a boon for middle class households as well because it might also lower the cost of consumer loans.(The writer is Senior Fellow, ICRIER)