Photo: Bloomberg
Photo: Bloomberg

Opinion | Maximizing consumption demand, but with limited available resources

Boosting the realty sector will generate benefits in both spending and jobs

The budget was an opportunity for the government to use fiscal and policy levers to provide a counter-cyclical stimulus and revive growth. It has chosen to do this within prudent fiscal limits, given the current resource constraints and a long-time frame for revival, acknowledging the risks from a more aggressive stimulus.

One of the notable features of the budget proposals was a set of realistic macroeconomic projections, which lend them a lot of credibility. Revenue projections are realistically based on only a modest recovery in FY21, with a reliance on aggressive privatization and asset monetization for additional revenue generation.

Given the relatively modest capacity utilization levels in several industries, reviving the capex cycle requires a boost to consumption. Reviving demand was a priority.

First, acceleration of efforts to double farmers’ incomes is a key aim. This has multiple dimensions. Direct spending on rural demand is proposed to be increased only modestly, but the objective clearly is to encourage private investment. Improving realizations will be key to the prime minister’s target for doubling farm income. As agriculture is largely a state subject, proposals encouraging states to implement model laws on land leasing, produce and livestock marketing, and contract farming have the potential to increase farm productivity. Rural supply chains with incentives for farm marketing and warehousing, including the Kisan Rail initiative for refrigerated transport of perishables, will smooth farm income volatility. Ancillary incomes from solar electricity panels on fallow and arid land will also help.

Second, the follow-up to corporate tax cuts was putting more discretionary income in the hands of the urban middle class. The budget estimates that over 40,000 crore tax revenue will be foregone through this initiative, which could provide a large pool of potential household demand. The target segment of reduced or exempt income comprises over 4.4 trillion taxpayers with total declared income of 19 trillion. Improving consumer confidence will be a likely bonus. The proposal to raise deposit insurance coverage limits from 1 lakh to 5 lakh may increase the flow of household savings into bank deposits.

Third, boosting the realty sector will generate benefits in both spending and jobs from the backward and forward linkages. This is a major plank of the prime minister’s “housing for all" initiative. The additional deduction of 1.5 lakh on interest on loans for affordable housing has been extended to March 2021, as also the tax holiday on profits of these project developers. Other relaxations have also been provided on capital gains from real estate transactions.

Fourth, MSMEs are not just a significant share of output, particularly in services. They they are also a large section of the consumption demand pool, being labour-intensive. Ease of doing business initiatives for this segment involve simplification in compliance and tax payment requirements, particularly for the smallest retailers. Expanding the potential of access of MSMEs to finance by widening the scope of financiers on TREDS (by amending the Factoring Regulation Act), increasing the turnover on the GeM portal and using guarantee mechanisms to boost credit will increase output.

An extension to facilitating the MSME ecosystem is fostering India’s vibrant entrepreneurial culture, coming up with “disruptive solutions to festering challenges". A well-functioning investment clearance cell, proposed for “end-to-end" support, will facilitate clearances at the central and state levels. Regulatory measures, such as the proposed and functioning sandboxes and lighter touch regulation for financial startups, will add to this support.

The signature theme of the Economic Survey was that “the invisible hand of the market supported by the hand of trust" will be key to India reverting rapidly back to high growth. Fostering trust was also emphasized in the budget speech, and is evident in the ongoing initiatives of the government for increasing transparency and simplifying processes. A significant step forward is the proposed amendments in the Companies Act on removing criminal liability for acts that are civil in nature.

India has chosen an ambitious and aspirational target of a $5-trillion economy by 2024. As with all such projects, effective implementation will be key. One important factor will be coordination with states in key segments that are focus areas in the budget and the broader reform and productivity programmes. The budget has some proposals for working with states, including the use of incentives, and these will need to become a priority.

Amitabh Chaudhry is managing director and CEO, Axis Bank

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