Giving a boost to private consumption – a challenge before the budget

GDP = Private Consumption + Private Investment + Government Expenditure + Net Exports. The Budget can have policy measures that can impact each of the above measures. One of the focus areas of the Interim Budget can be how to give a boost to private consumption.

Private consumption, especially in rural India, remains subdued

Private consumption in the Indian economy has picked up in recent months. But it is still not back to pre-Covid lockdown level, especially in rural India. Covid lockdowns had a devastating impact on private consumption. Sales of private consumption items such as two-wheelers still remain subdued in rural parts of the country. In December quarter, sales of Hero Motors came down y-o-y by 1%. According to a report by Jeffries, demand for packaged goods remained in a slowdown in rural India in the December quarter.

Increase disposable income of people

One way to give a boost to private consumption is to increase the disposable income of citizens. This can be done in the Interim Budget by giving tax reliefs and tax rebates. Lower taxation results in higher disposable income for citizens. This in turn results in people spending more on consumption.

High Inflation rate has lowered real income

High inflation rate has lowered the real income of citizens. This in turn has further put strain on private consumption. In order to fight rising inflation, RBI has raised interest rates successively. This has adversely impacted interest sensitive private consumption.

Focus should be on giving a boost to both investment and consumption

The focus of the government currently is more on increasing Investment in the economy. It has significantly increased investment in creating infrastructure. In FY 2023-24 budget, the government allocated an amount equal to 3.3% of GDP on infrastructure. It may allocate a similar amount in the budget for FY 2024-25. But it is also important that it announces measures that give a boost to private consumption by citizens. Indians are currently burdened under high inflation, high interest rate, and high unemployment.

Any measure announced in the budget that may give a boost to private consumption will be a positive for stocks of FMCG and Consumer Durables companies.