Cutting Personal Taxes Would Increase Demand in Economy

Slow down in Indian economyMany news reports suggest that the Indian government is considering revising personal tax structure by cutting tax rates as well as altering tax slabs with the purpose to increase disposable income in the hands of consumers. This obviously would be a right decision in reviving demand to some extent for Indian economy which is slowing down due to shrinking demand. However this would not be enough. There is need to increase the income of workers engaged in rural and informal economy also. But the problem is that government cannot ask to increase wages as it would also have direct negative impact on supply side as the increase in wages would not be received positively by the economy so cutting personal tax rates and changing tax slabs would be viable option. 

Moreover, considering the pressures (external as well as internal) on the government to revive the economy back into high growth mode, corporate are again lobbying to lower long term capital gain tax with the argument that it will help to broaden equity market. Obviously, there is merit in this argument but it is not the right time to do this. Rather government needs to concentrate on reviving economic activities by encouraging consumption. Also it is important that every rupee at this point is important as the Indian Government has already announced an investment of 102 lakh crore in infrastructure in next five years. This would have positive impact on the sentiments and better infrastructure for the economy but will have negative impact on fiscal deficit.

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