Budget 2020 is keenly awaited at a time when consumer spending is low and retail inflation is increasing – India’s retail inflation accelerated to 7.35 percent in December 2019 owing to the rising food prices. Similarly, the Consumer Price Index (CPI) crossed the RBI’s 2-6 percent target band in December 2019, the first time since July 2016. The government is expected to revive consumption through job creation, rural wage/income increase and spurring growth in manufacturing.
Over the last few months, the government has announced many new initiatives to give the economy a boost. These include a reduction in the corporate tax rate, lowering Goods and Services Tax (GST) rates on select items, removing ‘angel tax’ for entities registered with the Department for Promotion of Industry and Internal Trade (DPIIT), 100 percent Foreign Direct Investment in contract manufacturing, etc. However, many of these measures, being mid to long-term, take time to filter through and are yet to deliver the intended benefits.
Thus, the expectation from the industry and consumers is that the primary focus of this year’s budget should be on policy measures to give an immediate stimulus to boost consumption by increasing income of the consumers by way of personal income tax cuts, employment generation, income/benefit support schemes, etc. and to prioritise manufacturing to spur industrial growth and investments.
Here’s how it can do that:
Direct tax reduction: Reduction in personal income tax rates through rationalisation or reduction in tax rates, especially for the lower income segments. This will help in putting more money in the hands of consumers and will also boost consumer sentiment. Given the subdued demand for consumer goods, reduction in personal income tax rates could lead to a spur in industry growth.
As the government tries to bridge the gap between rural and urban India, there will be a greater focus on the lower-tier towns and cities. With rural wages having largely remained stagnant for the last few years and after adjusting for inflation, rural wage growth has averaged around 0.6 percent in the last five years. A pickup in rural income would have a cascading impact on rural consumption and economy growth.
Digital infrastructure: Another focus for the government is to digitise non-urban centres in the country through the roll-out of 5G, which will pave the way for consumer goods companies to offer their services digitally to the rural/rurban markets. E-commerce companies are also expected to gain the most from this, especially as they try to penetrate lower-tier markets and expand their customer base. This will also lead to an increase in consumer spending, as consumers would then have a greater variety of products and options to choose from for their day-to-day needs.
Kirana stores (traditional mom-and-pop stores) form the lifeline of country’s retail – there are around 12 million mom-and-pop stores in the country. These are expected to get a massive digital push, especially as large modern retailers and e-commerce companies increasingly partner with them to increase their outreach and in turn help kiranas digitise their processes.
Rationalization of tax rates: In order to boost consumer demand and spending, and to curb the rising prices of consumer goods, the government is expected to rationalise GST rates further in categories such as consumer durables, electronics and food products. Further, a reduction in import duties of gold from current 12.5 percent to lower rates may help increase the demand for gems and jewellery sector, and thus boost consumption.
Specific sectoral expectations to boost consumerism
Agriculture: Agriculture being a key sector in the economy, employing close to 50 percent of the population and contributing 15-17 percent of the GDP, the government could look at Direct Benefit Transfer (DBT) for agriculture input subsidy, using Aadhaar linkages so as to eliminate leakages. This would also help in putting money directly in the hands of the beneficiaries.
Textiles: The textile sector employs over 100 million people directly and through allied sectors, and forms a big part of the Indian economy. The sector needs to be incentivised to become competitive vis-à-vis exports from Vietnam and Bangladesh, especially regarding labour costs, raw material sourcing, training, manufacturing, finance, transportation, etc. The government may also help by allowing textile manufacturers duty-free access to key markets.
E-commerce: E-commerce faced significant turbulence in the recent past in terms of policies and directives. The sector thus requires a steady regulatory environment which will boost confidence in the sector and increase investments from abroad. Exports from India are a major focus of e-commerce companies, and the government could focus on simplifying rules for business-to-consumer exports from India to enable this. The government may also look at cautious opening of the e-commerce inventory-model for FDIs. Indian Express