Tax cuts to create mix of consumption and investment-driven multipliers: Finance Secy

In an exclusive interview with The Federal, Finance Secretary Tuhin Kanta Pandey has discussed the economic implications of Budget 2025, particularly the much-anticipated income tax exemptions.

Addressing concerns about the multiplier effect, Pandey explained, “The decision-making on this money has been transferred to the taxpayers. They will choose between savings, investment, and consumption.”

He emphasized that the exemption would create a mix of consumption and investment-driven multipliers, fostering economic growth.

However, concerns were raised about the shrinking tax base. Pandey clarified that while individuals earning up to Rs 4 lakh annually are exempt from filing returns, most taxpayers will remain in the system due to rebate-based structures.

“When incomes grow, so will the tax base,” he reassured, adding that the government is committed to broadening participation in the tax regime over time.

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Balancing growth and inflation

One of the major concerns of the Budget was its potential impact on inflation. With interest rates holding steady, many fear an inflationary surge due to increased disposable income.

However, Pandey dismissed these concerns, stating, “If we had increased the fiscal deficit to boost consumption, then inflation would have been a risk. But we are maintaining fiscal discipline.”

Highlighting the government's control over the fiscal deficit, he pointed out that while the target was set at 4.9 per cent of GDP, the government had successfully brought it down to 4.8 per cent, with plans to reduce it further to 4.4 per cent next year. This approach ensures a stimulus-driven economic boost without risking inflation.

Capital expenditure as a growth driver

Pandey outlined the government’s aggressive focus on capital expenditure (CAPEX). “If you look at the Budget, we have allocated Rs 11.29 lakh crore for direct government CAPEX, and another Rs 4 lakh crore for grants-in-aid for CAPEX projects,” he explained.

Investments in rural roads, drinking water supply, and infrastructure will drive long-term economic gains.

With total CAPEX at Rs 15.48 lakh crore, nearly matching the government’s borrowings of Rs 15.68 lakh crore, Pandey termed it a ‘dream spending’ scenario where the deficit is channelled into asset creation. “This is a stimulus without the risk of inflation,” he emphasized.

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The rupee and foreign investment flows

On the topic of the rupee’s depreciation, Pandey reassured that India follows a floating exchange rate system where fluctuations are driven by foreign portfolio inflows and US economic policies.

“When global investors seek safer havens, outflows put pressure on the rupee. However, India’s fundamentals remain strong, and we will continue attracting capital,” he asserted.

The government remains optimistic about regaining foreign investor confidence. “Markets react to uncertainties. Once stability returns, capital will flow back into India,” Pandey said, highlighting that growth potential remains intact despite external headwinds.

Disinvestment strategy amid global uncertainties

When asked about the government’s disinvestment strategy, particularly in the wake of global economic uncertainties, Pandey dismissed concerns linking foreign portfolio flows to the success of public sector divestments.

“Foreign investors operate in secondary markets. Our past successes like LIC’s listing and Air India’s privatization happened under challenging conditions,” he noted.

While large-scale disinvestments have slowed, Pandey asserted that market conditions play a role. However, he reiterated that the government is committed to long-term reforms in public asset management.

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GST and Centre-state fiscal relations

Addressing state governments’ concerns regarding GST and tax revenue distribution, Pandey firmly rejected claims that GST was an imposition. “Every state signed off on GST. The GST Council operates by consensus, ensuring states participate in every decision,” he stated.

On bringing petroleum under GST, he noted that the council has yet to reach consensus. “These decisions require agreement from all stakeholders. However, we continue working on rate rationalization,” he said, emphasizing the need for a balanced approach that considers revenue needs and public expectations.

Regarding states’ complaints about delayed tax revenue disbursements, Pandey maintained that the central government follows transparent processes. “There is a clear devolution formula set by the Finance Commission, and funds are released accordingly,” he said, suggesting that specific grievances be addressed at the ministerial level.

Boosting investment through Centre-state collaboration

Discussing ways to attract investment, Pandey praised proactive states like Tamil Nadu and Karnataka, which have excelled in ease of doing business. “Global capability centres and electronics manufacturing hubs are thriving in the southern states. The Centre fully supports state-led investment initiatives,” he said.

He highlighted recent Budget measures to encourage investments, such as presumptive taxation for technical services and safe harbour provisions for storage units. “These reforms ensure certainty for businesses and facilitate seamless global supply chains,” he noted, citing Apple and Tata’s expansion in the electronics sector as examples.

Also read: Tax relief or economic mirage? The middle-class dilemma

India’s stance on global trade tensions

When asked about potential risks from US trade policies, Pandey refrained from speculation but assured that India is closely monitoring developments. “We will act in the best interest of our nation,” he said, dismissing panic over tariff policies.

Clarifying India’s tariff position, he noted, “Contrary to perception, we are not a high-tariff country. Our average industrial goods tariff is 10.8 per cent, which is competitive globally.”

With Budget 2025, the government is striking a balance between fiscal discipline, tax relief, and capital investment. The focus remains on stimulating economic growth while keeping inflation and fiscal deficit under control. Pandey’s insights provide a clear picture of India’s strategy amid global uncertainties, reaffirming the country’s strong economic fundamentals and investment potential.

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