The household budget has four facets to it. On the income side, there are regular flows from salary, commissions and fees. Then, there are flows from investments in the form of dividends or interest. On the expenditure side, you have routine expenses like food, clothing, rent and travel to meet. In addition, you need to invest for the future. Here is how the Budget 2021 can address these four aspects.
What Budget 2021 can do for income flows?
Income levels are a function of your performance and growth. But it is also a function of system liquidity and macroeconomic growth. At a policy level, the Budget needs to commit to economic growth and to keeping the system liquid so that the economic growth can translate into higher incomes for people.
A simpler way is to increase post-tax incomes by reducing the tax burden. To help people in the more vulnerable segments, Budget-21 can enhance the tax-free slab from Rs250,000 to Rs500,000. This can be in lieu of the tax rebate so that it excludes a large segment of population from paying taxes. The government can also look at enhancing the Standard deduction limits for 2 years and then revert to a median level.
What Budget 2021 can do for investment returns?
In the last couple of years, the returns on debt products like bonds, bank FDs and corporate FDs has come down sharply in line with falling rates. However, this has sharply reduced the returns for people who depend on such income. What can the Budget do? One way is to keep some of the small savings rates higher with a time-bound assurance. Alternatively, the budget can introduce products with lower lock-in periods for individuals at higher returns.
The other long term solution is to build an equity investment culture. This can include specific categories of equity like PSUs and infrastructure stocks under Section 80C. The budget can also look to relax LTCG rules, make dividends tax-free and rationalize STT to enhance effective investment income for people.
What Budget 2021 can do for expenditure management?
In the last one year, the lockdown and social distancing norms helped families cut down on unnecessary expenditure and that helped budgets. Considering the current situation, the budget can go a step further. We have spoken about tax breaks and that can go a long way in reducing the outflows. But there is more that the budget can do.
The budget can look to cut GST rates on items of essential use like food, clothing and other daily needs. From a government revenue point of view, this can be made budget-neutral by imposing GST on other segments so that household budgets get cross subsidized. Most people without credit history have trouble accessing finance and the pandemic has made things worse. The government can make basic credit access available to each household. It is also expected that the health insurance scheme is extended to all middle class households so that health security can be attained at minimal cost.
How Budget 2021 can help in investing better?
One of the major problems that people faced in pandemic times is that they had to access their PF funds due to jobs losses or financial difficulties. That is a loss of social security. The government must encourage people to replenish their withdrawn PF in a time bound manner with additional tax breaks as an incentive so that they do not lose long term benefits. This will be like hitting two birds with one stone.
Unique situations call for unique ideas. The government must look to expand the CPSE-ETF on a much bigger scale and ensure that all families participate in the same. As an incentive, the government can allocate CPSE-ETF units with lock-in of 10 years where investors only pay 50% of the investment and get 100% allocation of units. The balance can be paid over time or adjusted against appreciation. It can be a novel idea to encourage wealth creation at an economical cost.
Many of these ideas may require a more thorough examination in terms of implementation and cost-benefit analysis. But in a difficult year, the Budget-21 will surely have to think out of the box.