BackBudget 2021: 'There is a need to boost household savings to fund future growth'
'Household savings have been on a downtrend for several years now and we need to increase the domestic savings pool to fund future growth. In recent times almost all incentives have been removed prompting a spending boom.'
PremiumBy Satish Ramanathan
Budget 2021 comes against the backdrop of a Covid impacted economy. India has come out fairly well in this crisis with some quick thinking by RBI and the Government. Yet, the impact of declining revenues and higher budgetary expenses has raised our consolidated (state + centre) fiscal deficit to nearly 12.1%. Furthermore this crisis has impacted the unorganised sector far more than the organised. In a way, the organised sector has benefitted marginally from the crisis. As a mid-term Budget, this will be crucial in setting long term goals and aspirations rather than medium and short term expectation management. Hence, this one is crucial budget.
We expect Budget 2021 to chart out a roadmap for fiscal consolidation, as this year was unusual. Hence markets were accommodative but this may not be the case in the future. Higher inflationary pressures and government borrowings may begin to nudge rates higher. That could burst the budding confidence that the economy is beginning to display.
Keep income tax rates steady and rationalise GST
Budget 2021, will need to continue on the strategy chosen in the previous year, i.e. reduce consumption and increase investments. Towards this, the government had increased tax rates for the higher income brackets and also included dividends as part of regular income and removed the Dividend Distribution Tax. We believe that has been an incentive for the industry to invest. Further, Labour reforms and corporate tax rates at 17% make India a competitive destination with large pools of manpower. We believe that there is no need to change income tax slabs any further and believe that GST rates need to be rationalised so that there is limited ambiguity in them. The recent buoyancy in GST collections points to increased shift to the organised sector from the unorganised. To encourage wide participation and increase collections, we recommend that rates are brought down and the number of slabs reduced.
Incentivise Household Savings and real estate
Infrastructure needs to grow and India needs access to low cost capital available overseas. We expect some measures in the Budget to encourage private participation in infrastructure. We expect the capital expenditure cycle to take longer as capacity utilisations are low, and hence the importance of infrastructure. We expect Production Linked Incentives to become a powerful tool to encourage manufacturing, and expect higher budgetary allocation. Real Estate is another high employment generator and needs to be encouraged. There is a renewed interest in real estate and with benign interest rates and lower prices, we expect real estate to pick up. This could have a multiplier impact on the economy.
Household Savings have been on a downtrend for several years now and we need to increase the domestic savings pool to fund future growth. In recent times almost all incentives have been removed prompting a spending boom, but India is no US, and requires the bedrock of Indian household savings.
Agriculture reforms and subsidies
Recent initiatives in agriculture are yet to have any meaningful impact, but India needs to rein in subsidies and ensure that agriculture is profitable and uses contemporary seeds and technology. We hope that the ensuing Budget increases allocation to farm mechanisation, improves the irrigation network and also encourages research and development.
MSME Segment and Services
Covid has impacted the MSME segment considerably, perhaps more than their larger peers as they have limited access to capital. This segment was already impacted due to GST and its cascading effect. Although, the government has eased credit access, it is doubtful, whether that has had the necessary impact. MSME’s need to access counselling/technology and capital. We hope that the budget tries to foster the MSME segment to realise its full potential.
Most of India’s recent GDP growth has been on the back of the services sector. This sector has been impacted significantly due to Covid, and needs urgent relief. Hotels and restaurants and segments such as these will require low cost of capital along with some loans to be forgiven to help them come back.
(The author is the MD & Chief Investment Officer – Equity, JM Financial Asset Management. Views as expressed by the author.)
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