Union Budget 2022: Why Nirmala Sitharaman Should Be Generous Towards The Salaried Class This Time

The union budget is around the corner and finance minister Nirmala Sitharaman will have the task to keep everyone happy. While the Indian economy has recovered from the pandemic-blues for sure, it’s still far away from the double-digit growth that used to be the target of every finance minister till 2018.

The reason behind the drastic fall in India’s GDP growth rate (government’s estimate of 9.2 per cent for FY22 are on the base of de-growth of 7.3 per cent) over the last few years is the fact that of the four components of the GDP- personal consumption, private investment, government investment and net export- only investments coming from the central government have been the mainstay of the Indian economy.

As a result, government finances are under severe pressure with the average fiscal deficit of the union government hovering at about 6 per cent of GDP since 2018-19, with last year’s figure touching a high of 9.3 per cent.

Despite announcing measures such as recapitalisation of government banks, pumping in several lakh crores in infrastructure and offering corporate tax cuts worth Rs 1.42 lakh crore in the last few years, the growth in the remaining three components of the GDP has remained unimpressive.

According to CMIE data, India’s private final consumption expenditure (PFCE) declined by six per cent in nominal terms to Rs.115.7 lakh crore in 2020-21 from Rs.123.1 lakh crore in 2019-20. “Consumption expenditure growth has been slowing through the last decade. Growth in PFCE that averaged at 16.2 per cent per annum during 2010-14, fell to 12.1 per cent per annum during 2014-17 and further down to 10.5 per cent per annum during 2017-20. Then, suddenly as the Covid-19 struck India this declining but still double-digit growth in PFCE shrank spectacularly.”

Tax benefits provided to the corporate sector have not resulted in private capital expenditure, indicating that unless private consumption goes up, the industry will not invest in creating new capacity. 

“The past few budgets have made clear the government’s intent to drive growth by leaning on a mix of Capex and reforms, expected to alter the growth trajectory over the medium to long term. But with the pandemic throwing millions out of work and their ability to spend weakening considerably, immediate measures to support incomes and private consumption are crucial and can create a much-needed bridge to the medium-term path,” Dipti Deshpande, principal economist, CRISIL, wrote in a column for Outlook Business.

Boosting Consumption

The Covid-19 pandemic disrupted economic activities for two consecutive years. While lakhs of people either had to take salary cuts several others in the formal sector have also lost jobs. Those who were lucky to have survived the pandemic without facing a salary cut had to settle with no or single-digit hikes. In 2020 the average salary increment in India was 4.4 per cent and 8 per cent in 2021, according to Deloitte’s Workforce and Increment Trends survey 2021. For 2022, it has been pegged at 8.6 per cent. The salary hikes should be viewed in conjunction with the Reserve Bank of India’s projection of Consumer Price Index (CPI) inflation of 5.3 per cent for the financial year 2022.

“The salaried class is caught between the devil and the deep blue sea. You do not have many avenues to save taxes. A few years back, there was a significant amount of surcharge levied. We have the highest tax slabs with a surcharge for a high-earning individual. And that’s pretty steep. If the government wants to ensure that people are spending more, then more money needs to be put in the hands of the people,” Aarti Raote, partner, Deloitte India, said.

The standard deduction was discontinued in FY 2004-05 for salaried individuals. “Before that, the amount of available deduction was Rs 20,000 - 30,000 p.a. (subject to income thresholds). From FY 2018-19, medical reimbursement (up to Rs 15,000 p.a.) and travel allowance exemption (Rs 1600 per month) were done away with for salaried individuals in lieu of standard deduction,” Parizad Sirwalla, partner and head, global mobility services-tax, KPMG, said.

There is, therefore, a case for considering an increase in the standard deduction from the existing Rs 50,000 to Rs 100,000 per annum. The benefit of standard deduction could also be made available to taxpayers opting for the new optional tax regime as well, Sirwalla said.

“The government introduced a new optional tax rate regime in its budget two years back, giving taxpayers the option of choosing between the old regime or the new regime section 115BAC of Income Tax Act, 1961 (‘the Act’). However, such a new tax regime is subject to a disallowance of many exemptions and deductions (including prominent and common ones, such as section 80C and 80D benefits and home loan interest deduction along with certain allowances for the salaried individual such as house rent and leave travel allowance etc.), leaving the taxpayer relatively less interested in switching to the new tax regime,” Sirwalla said.

Rising Medical Inflation

The pandemic amplified the already steep medical costs and fuel cost has also been a cause of concern for the average middle class. Pure protection term insurance premiums jumped 25-45 per cent due to increasing re-insurance rates in the global market. Since the outbreak of the pandemic, premiums charged by several life insurance companies have gone up since last year because of the high mortality rates. This round of increase is also due to a higher death rate.

According to Policybazar, health insurance premiums have increased by up to 100 per cent in some insurance providers for people of higher age. For people over the age of 55 – 66 years, the premium amount has doubled. If the health insurance for two people in the year 2019 – 2020 was Rs. 28,000, then it is between Rs. 55,000 to Rs. 60,000 this year, according to Policybazar.

Covid-19 has only exacerbated the rising healthcare problems. Healthcare costs have increased manifolds. Surgical costs have almost doubled in the last five years. “Currently, premium paid for medical insurance/ expenditure incurred on medical treatment is allowed as deduction up to Rs 50,000 per year in certain specific situations. However, considering the ever-increasing medical cost (amplified by the recent pandemic situation), this limit may be considered for revision at least up to Rs 1 lakhs per year,” Sirwalla said.

With this, one of the fallouts of the pandemic has been that those not in the higher-income bracket, have not been able to claim the benefit of certain kinds of deductions. Exemptions like leave travel encashments and house rent allowances, and several others, could not be claimed because mostly everyone is working out of their homes.

“It’s not like people do not have to spend anything. Many people have made a lot of Covid-related expenses. The relief last year was more for people who got aids from employers but a lot of people spent out of their own pockets. In fact, it’s is a higher brunt for them where they are not getting any relief and they are spending on their own,” Raote said.