If I were the FM: Keep interest rates low, boost consumption & remove LTCG

Shiv Gupta

As we scan the environment, we see slowing growth, weak job creation, stress in the NBFC space and concerns originating from abroad.

Additionally, political capital has a short shelf life. Hence, the current conditions call for decisive confidence-boosting actions in the near-term from the Finance Minister.

This, combined with a reform-led action plan for sustained growth in the long-term, essentially constitutes our wish-list.

Interest Rates, Consumption, and Investments:

Consumer demand is decelerating. Consumption was one of the legs of the three-legged stool – alongside private investment and government spending - that remained in place over the past decade.

The decline in rural consumption is well documented. We ascribe the decline in urban consumption to changes in consumption behaviour, some saturation in consumption preferences, and an increased tax burden on the salaried class, which are paying marginal tax rates of as much as 48 percent when including GST.

Any plan to revive growth must start with re-invigorating consumption demand. India has amongst the highest real interest rates in the world.

Hence, our prescription is a continued reduction in interest rates while concurrently resolving the transmission challenge, possibly via mandated policies.

These actions ought to increase disposable income for consumers and improve ROIs for business investments.

Tax Base Rationalization:

According to recent data, roughly 4.5 percent of Indians pay income tax, which means 95 percent of the Indians do not. A continued focus on measures to widen the tax base and improve compliance without burdening the minority that pays tax already could yield much needed incremental tax collections.

At the same time, we recommend abolishing the long-term capital gains tax, which would spur capital flows and provide growth capital to productive users.

The PSU Albatross:

After allocating Rs 46,000 crore to the PSU banking system prior to elections, the government is projected to allocate an additional Rs 30,000 crore in the upcoming budget.

This capital could be meaningfully allocated to public-private partnerships, skill development programmes, and investments. It is time the government looked to privatize some of the smaller PSU banks, unlocking substantial value and focusing administrative bandwidth in areas that promise catalytic gains for the economy.

Agriculture, Services, and Tourism:

As economies mature, the proportion of the workforce dedicated to agriculture normally declines. Incremental job creation can only come from services and manufacturing. Within services, tourism is one low hanging fruit.

Tourism invites both domestic and foreign capital and creates jobs in hospitality, transportation, and retail. Tourism ecosystems are potentially large markets if the government can provide the requisite infrastructure and policy support.

There is evidence that some of these are underway. However, given the geographical and cultural breadth and depth of the country, there is massive ground to cover if the vast multiplier potential is to be fully realized.

Structural Reform:

A pragmatic fiscal policy combined with a decline in the cost of capital should provide a platform for reviving growth in the near term.

Looking beyond the capital, we hope to see the will and the wherewithal to tackle land and labour reforms that will truly provide a platform for elevated and sustainable growth in the next decade and beyond.

The author is Chief Executive Officer, Sanctum Wealth Management.