A common question that is being these days is whether India really needs a consumption boost. After all, most products are actually undersupplied, which is leading to a rise in prices. Here we need to differentiate between what is happening at a production level and at a consumption level.
The supply chain constraints may have increased costs of cars and FMCG products and these are being passed on to the consumer. The consumer really does not have much of a choice. On the one hand, income and job uncertainty is quite high forcing the consumer to be conservative. At the same time, prices have gone up sharply.
A consumption boost is all about building consumer confidence. The situation looks under control because supply is still limited, but as consumption expands, businesses will have the incentive to produce and supply more and that is how the vicious cycle of low growth and low consumption can be broken. But how can Budget 2022 really do it.
1. How do you pencil a consumption story in the Budget?
Before we go to the prescription, let us look at the magnitude of the problem. As per the latest RBI survey on consumer confidence, the consumer demand is still abysmally low. The macro enthusiasm is not translating into micro demand. That is what the budget needs to address. As per a survey conducted by CLSA, nearly 75% reported either losing jobs or losing income over last 2 years. That is huge. Most consumption indicators have been falling sequentially.
It has been observed that the best way to boost consumption is to give entry level tax breaks. For example, people at lower income levels have a high propensity to consume and tax break translates into demand with minimal lag. At a macro level, government can look to cut excise on petrol and diesel further, they can enhance standard deduction, they can offer bigger tax breaks on housing or even a credit linked subsidy scheme. We will look at the specifics later.
2. How to go about boosting disposable income?
The trick in boosting consumption is to boost disposable income and that is what the budget must focus on for FY2022-23. Here are some specific ideas that can boost consumption by improving disposable incomes.
One thing the government is likely to do in the Union Budget 2022-23 is a big boost to infrastructure so that the multiplier effect is felt on jobs and on disposable incomes. This is an indirect impact, but the multipliers are quick and high.
The government can consider raising taxable income levels and also enhance standard deduction from the current Rs50,000 to Rs100,000. Another way is to enhance the outer limit of Section 80C from Rs1.50 lakhs to Rs3.00 lakhs to make it more meaningful.
Long term security can make a big difference to consumption, especially since social security is quite low in India. Medical insurance premium limit can be enhanced to Rs50,000 for everyone and Rs100,000 for senior citizens. The GST of 18% on health premium is too steep and can cut to 5%. Above all, scrapping LTCG tax on equity will mean that the long term equity investments for future goals will be intact.
3. How the government can boost select consumption sectors?
Consumption is a wide term and can include FMCG products, automobiles, consumer lending, apparel etc. How can the Budget re-direct specific sectors.
Automobiles is a sector that deserves lower GST. Taxing automobiles at 28% is just not fair and a reduction to 18% can be a big consumption boost.
Budget can plan a series of GST reliefs and input tax credit relief on mass consumption items so that inflation headwinds can be offset and leave more disposable income
Rural consumption is more than 50% for most products including automobiles and FMCG products. Hence, higher allocation to PMAY and bigger MGNREGA allocations can boost farmer’s income. Similarly, alternate sources of income for farmers can all go a long way in boosting rural incomes. This can supercharge a host of sectors.
4. Finally, how to walk the delicate fiscal tightrope
Why is it a fiscal tightrope? The government needs to spend heavily to boost consumption in Budget 2022. But, that also means higher fiscal deficit. Now, higher fiscal deficit has a cost in that it keeps interest rates high and makes sovereign ratings vulnerable. How can the government strike a balance.
Higher allocations to job creation schemes will help. The government needs to enhance allocations to MGNREGS and rural construction in the hinterlands. In the absence of work in urban clusters, people are staying longer in villages. This is a textbook case to boost consumption. Job percent days need to grow higher.
The government can look at similar job creation schemes in urban India too. There are a large number of unemployed workers in the construction business and this can provide succour in urban areas too. Impact on consumption at aggregate level will be huge.
Above all, budget has to control inflation in essential categories, because as long as that remains high, consumption is never going to pick up. Cuts in GST and other levies can go a long way in taming inflation without forsaking revenues.
A delicate balance is needed in the budget and it is tough. But to boost consumption, the budget must go all out to pamper the vulnerable segments.