Economic Survey prescribes cut in income tax, quick remonetisation; will the Budget deliver?

Apart from income tax, the Economic Survey also said the time-table for cutting corporate tax must be accelerated.

Arvind Subramanian, Chief Economic Adviser during a press conference in New Delhi on Tuesday. (EPS | Shekhar Yadav)

The Economic Survey presented by Chief Economic Advisor Arvind Subramanian, a day ahead of the Budget, proposed a reduction in the individual income tax rates, even as it recommended widening the tax base to bring in more high-income earners under its ambit. Will Finance Minister Arun Jaitley deliver tomorrow?

Apart from income tax, the Economic Survey also said the time table for cutting corporate tax must be accelerated.

Here’s a look at the other highlights of the survey — points to watch out for in the Budget tomorrow.

Demonetisation

• The biggest impact on the economy in recent times has been the demonetisation of high value notes undertaken from November 8, 2016. Even limits on withdrawals of cash from individual accounts are being lifted, the Economic Survey says it will affect growth rate of the country by 0.25-0.5 per cent.
• To ensure that growth rate returns to normal, the Economic Survey says, demonetisation should be followed up with fast and demand-driven remonetisation, tax reforms, GST and lower taxes.
• The Survey also says that the cash crunch being faced by the people since demonetisation will completely ease by April this year with fast remonetisation, but that  the supply of currency should follow actual demand and not be dictated by official estimate of desirable demand.
• It also recommends that government windfall arising from unreturned notes should be deployed towards capital spending

Banking

In the backdrop of the large number of loans that the banking sector is unable to recover, including Vijay Mallya’s Rs 9,000 crore, the Survey suggested setting up a recovery agency, much like there are for the recovery of loans  given to individuals by banks. 

• Suggests setting up public sector asset rehabilitation agency to take charge of large bad loans in banks
• Central agency with government backing could overcome coordination and political issues on bad loans

Poverty allevation

As an alternative to a plethora of schemes set up by states to help support those living below the poverty line, a Universal Basic Income (UBI) has been proposed.

• The UBI would cost as much as 4 to 5 per cent of GDP, an amount that is the equivalent to double the Budget allocation for Defence sector two years ago, which stood at 2.4 per cent.
• The Survey, therefore, says this may not be implementable

Growth

While the survey predicted that overall growth rate would fall to 6.75 to 7.5 per cent, from the baseline of 7 per cent, it suggested incentivising states for good fiscal performance.

• Growth rate of industrial sector will fall from 7.4 per cent last fiscal to 5.2 per cent this fiscal
• Service sector estimated to grow at 8.9 per cent in 2016-17.
•  Farm sector to grow at 4.1 per cent this fiscal, up from 1.2 per cent last year