What $5 trillion target translates for Indian economy

If Centre focuses on faster economic growth in 5 years, financial assets in equities and govt debt market could get attractive as interest rates fall
What $5 trillion target translates for Indian economy

In personal finance, you end up dealing with a lot of numbers. They usually tell a story. Some numbers are real. And then, some numbers outline a vision. Personal finance is all about the future of your wealth.

The Indian government has set an ambitious target of making India a $5 trillion economy over the next five years. Expert opinions are divided vertically and gravitate between hope and despair. Those who believe that India can move from a near $3 trillion economy today to $5 trillion in five years pin their hopes on a growth rate that is considerably faster than the sub-seven per cent now.

For your money, we will assume that the government takes all the right steps. India grows at near 8 per cent over the next five years to get close to being a $5 trillion economy.

That is a significant addition in productivity from where we are today.

Your taxes

In a bid to achieve this target, the government will have to increase spending on infrastructure. To enable that, the government’s direct and indirect taxes have to grow. The Goods and Services Tax (GST) collection has to break the `1 lakh crore barrier every month consistently. There may not be any increase in rates. However, the government may bring more goods and services in the tax net or focus on increasing the number of taxpayers. In all likelihood, it will try to simplify tax administration further.

The same would apply to personal income tax. A committee of experts will soon submit a report on an overhaul of the Income Tax Act. It is likely to simplify taxation. You may expect a cut in exemptions and a lower tax rate over the next five years. Individuals and businesses would be taxed for both the income and the expenditure. The government needs money to boost social and physical infrastructure. As a result, it would be safe to assume that taxes you pay would rise steadily in the next five years.   

Your loans

A key impediment to fuelling growth is the inability of public sector banks to lend. The banking system is saddled with non-performing assets. They are unable to lend to genuine borrowers as they concentrate on recovering previous loans. 

This is despite rapid rate cuts by the Reserve Bank of India earlier this year. Banks are not able to pass on lower interest rates to borrowers. They are forced to keep aside money to provide for any potential losses due to bad loans. The government and the RBI would have to concentrate on bringing the overall interest rates in the economy down. That means loans would get cheaper over the next five years. With a rising inventory in the real estate sector and falling automobile sales, home loans and car loans would get more reasonable — the government, and housing and automobile industries will have to lead from the front to achieve the growth target.

Your investments

If the government concentrates on faster economic growth over the next five years, investing should be a focus for you. Your surplus income must be invested and not just saved. 

Financial assets in equities and government debt market could get more attractive as interest rates fall. Businesses that rely on India’s economic growth would be interested in expansion. That needs a nudge from the government. Tax incentives to specific sectors could boost the so-called ‘animal spirits’ in the economy. 

In that context, the next budget in February 2019 would assume significance. You may have to keep a watch on sectors that get the push from the government. Shares of companies in infrastructure, agriculture and the consumer goods and consumer finance space may continue to gain ground. These businesses have to thrive for any economy that aspires to grow at over 8 per cent per annum.

You must stay with your systematic investing if you are already into it. For those who are starting to invest, you may want to look at some top-performing diversified equity or balanced funds or exchange-traded funds.  

The path ahead is fraught with a lot of ‘ifs’ and ‘buts’. The government may not succeed in pleasing all segments of society in the economy.

The bright side is that the government has made this a stated objective. Even if India falls short of $5 trillion, it may not be such a bad thing for your finances.

Related Stories

No stories found.
The New Indian Express
www.newindianexpress.com