Record tax cuts in Budget to spur consumption, says CEA Nageswaran

By Ruchi Bhatia and Anup Roy

   

India’s economic growth slowdown is temporary and record tax cuts announced in the budget will help spur consumption and improve private investments in the world’s fifth-biggest economy, a top government official said.  

 

“It’s premature to say that we are destined to grow at 6.5 per cent for the longer term,” India’s Chief Economic Adviser V. Anantha Nageswaran told Bloomberg TV’s Haslinda Amin in an interview on Monday. “When the global conditions change, we will grow at much higher rate.”

 

In the Economic Survey last week, Nageswaran said that Asia’s third-largest economy is expected to expand at a modest clip of 6.3 per cent-6.8 per cent in the coming fiscal year, significantly below the 8 per cent levels it said were needed to meet Prime Minister Narendra Modi’s goal of making India a developed nation by 2047.  

To stimulate the economy, the Modi government in its annual budget on Saturday announced $12 billion in tax cuts — the biggest such relief in the country’s history. The reduction comes at a time when urban consumers have been holding back purchases as falling wages and high inflation impacted household incomes. The move will put extra purchasing power in the hands of the middle class and “is one way of boosting domestic demand drivers rather than relying on external” factors for growth, Nageswaran said. 

 

The tax cuts will also nudge the private sector to ramp up their capacity, he added. India’s private sector spending has been tepid for several years now, hurting growth potential. 

 

However, it is “unrealistic to expect” companies to boost investments quickly in a slowing economy, said Sajjid Chinoy, chief India economist at JPMorgan Chase & Co. and a part-time member of the economic advisory council to the prime minister. The central bank first needs to step in to “hopefully drive an expansionary impulse,” he said, adding that he expects the Reserve Bank of India to start with 25 basis points cut in interest rates this week, provided the global financial conditions do not worsen much. 

Domestic Resilience

Through the budget, the government acknowledged “the uncertain global environment that prevails at this point” and focused on building “domestic resilience,” Nageswaran said, a day before President Donald Trump’s new tariff plans for Mexico, Canada and China come into effect. 

 

Despite global headwinds, the chief economic adviser called Modi’s economic targets for 2047 “very eminently achievable.” The government is “realistic in projecting a minimum achievable growth rate” for the next fiscal year, and even those numbers make India the fastest-growing major economy in the world, he said. 

 

When asked if the government made sweeping cuts on import levies to placate the Trump administration, Nageswaran said the steps were aimed at making the South Asian nation more competitive. 

 

“India is doing what India needs to do for its domestic context,” he said, adding that import duty reductions will help the country’s position in global supply chains. 

 

Read More: India Seeks to Shake Off ‘Tariff King’ Label in Reply to Trump

 

On the falling local currency, Nageswaran said the rupee’s fall to a record low is in line with other markets and it is still “doing better than others because of strong domestic fundamentals.”