Any new tax in budget could hurt India's recovery, warn economists

 A so-called Covid cess shouldn't be announced because the economy is still normalising after a strict and vast lockdown, Sonal Varma, an economist at Nomura Holdings, said on Thursday

Any new taxes in India’s budget would impede a nascent economic recovery, economists said, amid speculation that Finance Minister Nirmala Sitharaman could impose an additional levy on the wealthy to fund the government’s pandemic-related expenditure.
A so-called Covid cess shouldn’t be announced because the economy is still normalising after a strict and vast lockdown, Sonal Varma, an economist at Nomura Holdings, said on Thursday in a Q&A with Bloomberg. Abhishek Gupta of Bloomberg Economics warned that such a levy risks hastening capital outflows.

"The trend over the last few years has already raised the total taxes for high income earners to 42.7 per cent, including cess and surcharges, from around 30 per cent,” Gupta said during the Q&A. “A further rise could lower their incentive to invest and earn in India."

Sitharaman needs to boost spending to dig India out of an unprecedented recession when she presents her budget Feb. 1, while keeping a watchful eye so that the deficit doesn’t blow out. India’s financial year runs April 1 through March 31.

Here are some condensed excerpts from the interaction with Varma and Gupta:
Budget Deficit
Varma: We are expecting the centre’s fiscal deficit to widen to 6.8 per cent of GDP in FY21, nearly double the original budget target of 3.5 per cent set before the pandemic, but much better than our initial estimate of over 8 per cent in the midst of the pandemic. That’s because a faster-than-expected economic normalisation will boost tax revenue and total spending will be lower.

Gupta: While we were earlier expecting central government fiscal deficit to be roughly around 7 per cent or so, we have now estimated it to come in lower at about 6.6 per cent of GDP in fiscal 2021. The recovery has been sharper than anticipated, and we have seen more buoyant tax collections since October.