It is surprising that the budget chose not to incentivise household savings which could have been used for financing long-term projects
In an attempt to prop up a sagging economy, the Union Budget 2020-21 has unveiled an alternate income tax regime hoping that it will increase household disposable income and provide the much needed fillip to consumption. The government has provided taxpayers the option of shifting to the new regime with lower tax rates, provided they forego all their exemptions and deductions.
As tax payers tend to take advantage of exemptions and deductions to channel part of their income towards physical and financial savings, however, this measure, while meant to incentivise consumption in the short run, may end up reducing household savings and thus the domestically available investible surplus in the economy. Considering the fall in the savings rate in the economy, it is surprising that the budget has chosen not to incentivise domestic savings.
In an economy, savings form the pool of investible surplus. In India, the surplus savings of households are absorbed by the government and the private corporate sector. As per the 12th Finance Commission, the total transferable savings of the household sector were around 10 per cent of GDP, which combined with a current account deficit of 1.5 per cent, would be enough to finance the government (Centre and states) fiscal deficit of 6 per cent of GDP, fulfill the funding requirement of the private corporate sector of around 4 per cent, and of non-departmental public enterprises to the tune of 1.5 per cent.
But, over the past years, household savings in the economy have been falling, as with sluggish income growth, they have been dipped into for financing consumption, and borrowings have also increased — incremental financial liabilities of households have in fact risen from Rs 3.8 lakh crore to Rs 7.65 lakh crore in 2018-19. Latest data also shows a decline in both gross and net (excluding financial liabilities) household financial savings in 2018-19.
In this context, it is surprising that the budget chose not to incentivise household savings which could have been used for financing long-term projects. Perhaps the government is hopeful that the decline in domestic savings will be offset by the flow of savings from the rest of the world. The budget has raised the limits for foreign investment, and has offered incentives to sovereign wealth for investing in India. But the focus should have been to create a pool of domestic savings to finance long-term investments in infrastructure, especially at a time when the government has unveiled an ambitious infrastructure pipeline.
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