Asia Economy

India must spend — not cut taxes — to boost ailing economy, says professor

Key Points
  • India's government is set to announce its budget for the coming fiscal year on Saturday.
  • The key to reviving India's economy is increasing government spending, not cutting taxes, said Arun Kumar, Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences.
  • Kumar said government spending has to target the rural economy and "unorganized sectors."
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India's budget must boost 'unorganized' sector to stimulate economy: Prof

The key to reviving India's economy is increasing government spending, not cutting more taxes, an economics professor said on Friday.

India's government is set to announce its budget for the coming fiscal year on Saturday. The budget comes at a time when Asia's third-largest economy grew by just 4.5% year over year in the three months that ended in September — its slowest expansion in six years.

To boost growth, Prime Minister Narendra Modi's government last year announced a surprise cut to corporate taxes. Several analysts have predicted the government might cut personal income taxes in the coming budget to boost consumer spending. That may not help the Indian economy, said Arun Kumar, Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences in New Delhi.

"In India, personal income tax is paid by effectively only about 20-22 million people," he told CNBC's "Street Signs Asia."

"Out of a population of 1.3 billion, only (giving) concession to 22 million people, that's not going to raise demand very much. So, I think expenditure is a better way to do it rather than tax cuts," he added.

Kumar said government spending has to target the rural economy and "unorganized sectors." The latter refers to parts of the economy that employ workers without written contracts, paid leave, and health or social security benefits.

The informal sectors account for roughly 94% of India's total employment and 45% of the country's output, Kumar estimated. That's also where the growth opportunities are, he added.

One way to lift that part of the Indian economy is to increase government spending in rural infrastructure, education and health — which would in turn create and improve work opportunities for workers, said the professor.

WATCH: Why is India's growth slowing?

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Why is India's growth slowing?