Come February 1 and Finance Minister Nirmala Sitharaman will present the second budget of her tenure. This comes against the backdrop of a 6-year low GDP growth of 4.5 per cent in the July-September quarter and 5-year high consumer inflation of 7.35% in December.
Demand has received a jolt in the recent past as concerns over the economy, decline in agricultural income in rural areas, rise in unemployment and unavailability of credit have turned people into conservative spenders. According to the latest RBI Consumer Household Survey, the income growth has failed to keep pace with consumption.
The government has been working on multiple fronts to spur the economy. It has initiated various supply-side measures such as reduction in corporate tax, bank merger and allowing 100 per cent FDI in select sectors. Supply-side economics focusses on fuelling economic growth by lowering taxes and decreasing regulations.
The government has also adopted demand-side measures by way of infusing money into MSMEs, housing and automobile sectors. Demand economics aka Keynesian economists believe that demand situation is the primary factor that drives economic activity and stimulating demand is the anti-dote to economic slowdown. However, these measures have not had the desired effect thus far.
Will the government step up public spending, incentivise private investment, stimulate consumption and increase personal income tax threshold in the upcoming budget to kick-start consumption, is the moot question.
Mr Abheek Barua, Chief Economist, HDFC Bank, said in a report that the upcoming budget is unlikely to mark a departure from past budgets. There may not be any major fiscal stimulus to ramp up growth as the finance ministry itself has capped government spending in Q4 FY20. And there may only be minor tweeking of tax slabs as a cut in income tax is unlikely to be enough to boost consumption, given the narrow tax base (only 5.7% of India's population paid income tax in FY19)
Mr Barua rather expects a higher budgetary allocation for Direct Benefits Transfer (DBT) schemes such as National Social Assistance Programme (NSAP), Pratyaksh Hanstantrit Labh (PAHAL), Pradhan Mantri Gramin Awaas Yojana (PMGAY) and Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), so as to provide much-needed impetus to growth.
National Social Assistance Programme (NSAP) is a social security scheme that provides monthly financial allowance to the elderly, widows and persons with disabilities. Under the Direct Benefit Transfer of LPG (DBTL) or PAHAL (Pratyaksh Hanstantrit Labh) scheme, a consumer receives the LPG subsidy directly into his banking account after purchasing gas cylinders at the prevailing market price.
Pradhan Mantri Gramin Awaas Yojana (PMGAY) is meant to ensure housing for the rural poor. It provides financial assistance worth Rs 1,20,000 in plain areas and Rs 1,30,000 in difficult areas for construction of houses. Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) aims to enhance livelihood security in rural India by providing at least 100 days of unskilled manual work employment in a financial year.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, also favoured demand-side incentives on the part of the government. "The government should aim to boost consumption in the near term through accelerated spending on rural infrastructure and employment generation (PMGSY, NREGS, PM-KISAN)," he emphasized.
Drawing attention to the pitfalls of cutting income tax, the senior economist said, "While income tax cuts could boost sentiment, the actual impact may not be as large given the narrow base of tax filers as well as relatively lower consumption gains out of higher disposable income."
Suvodeep Rakshit went on to highlight the need to unclog the credit channels, especially NBFCs, such that the MSME sector and consumers reap the benefit of easier credit. He also emphasized on providing tax incentives for housing as an uptick in the realty sector would translate into greater employment opportunities for the rural workforce.
At the end of the day, the government can only sustain consumption over the long term by infusing capital in key infrastructure sectors, easing up business, boosting manufacturing and exports, and providing a stable policy-based environment for private sector participation.