
Vivek Kaul: The Union budget should focus on reviving private consumption
Summary
- That is a key aim, since private investments haven’t picked up, but the government may have too little fiscal space for major tax cuts that could put money in the hands of consumers.
The Reserve Bank of India (RBI) recently released figures for net household financial savings (flow) during 2023-24. These savings stood at 5.3% of gross domestic product (GDP), up slightly from 5% in 2022-23.
In 2019-20, they stood at 8.1%. The pandemic broke out in March 2020 and in 2020-21 these savings jumped to 11.5%. So, what do these figures tell us?
First, net household financial savings have come down significantly over the years. In 2018-19, before the pandemic, they stood at 7.9% of GDP.
Second, in the post-pandemic world, income growth for an average Indian has been slow, and given that they have had to spend a greater proportion of their income to meet expenses, household financial savings have fallen.
One possible explanation could lie in the fact that more people are working in agriculture now than before the pandemic.
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Third, high food inflation from 2022-23 seems to have led to a greater proportion of income being spent. From April to November this year, food inflation, which forms nearly two-fifths of the consumer price index, has averaged 8.4%.
It averaged 7.3% and 6.9% during the same period in 2022 and 2023, respectively. With quite a few state governments launching cash distribution schemes, food inflation is likely to remain high.
Fourth, there has been an increase in household financial liabilities, implying that people have taken on more loans to fund consumption. In 2018-19, these liabilities had stood at 4.1% of GDP. They stood at 3.8-3.9% over the next three years and jumped to 5.9% in 2022-23, and further to 6.4% in 2023-24.
Fifth, a clear impact of the income of the average Indian growing slower and liabilities growing faster has been a slowdown in private consumption growth. This is now clearly visible in the net sales figures of listed non-financial firms. In 2023-24, these grew by just 1.4%.
Adjusted for inflation, it can be safely said that volume-wise, companies did not sell as much stuff in 2023-24 as they did in 2022-23, indicating a slowdown in consumption.
In fact, the numbers for the first six months of 2024-25 do not inspire much confidence either. The net sales of listed non-financial firms have grown by a little over 1% in comparison with the same period in 2022-23.
Essentially, over a period of two years, they have largely been flat and that’s not good. And this is without adjusting for inflation.
Sixth, both the annual budget of the Union government and monetary policy of the Reserve Bank of India (RBI) are due in February 2025. Currently, there is great pressure on RBI to cut interest rates to encourage consumption.
But what increasing financial liabilities tell us is that a good part of economic growth in 2023-24 was perhaps driven by people borrowing more. There is already talk about increasing defaults in the smaller personal loans space.
Further, loans against gold jewellery given by banks grew by more than 50% in September and October, and that does not augur well.
RBI also has to take other factors into account before deciding to cut interest rates, everything from inflation to the dollar-rupee exchange rate to the maturity composition of deposits with banks.
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Seventh, as far as the Union government is concerned, it has been trying to take the investment route to promote economic growth. But fresh private investment continues to remain subdued.
These companies are probably waiting for consumption to pick up to a level where the expansion of capacity becomes necessary.
Eighth, keeping these factors in mind, one of the main objectives of the forthcoming Union budget should be to help boost consumption growth and that can be done by putting more money in the hands of people. The fastest way of doing so is through tax cuts.
Also, driving economic growth by promoting investment doesn’t seem to have worked, at least not as well as was hoped. In this scenario, cutting taxes on petrol and diesel and encouraging oil marketing companies to cut prices becomes important.
So does cutting the goods and services tax (GST) on two-wheelers. These moves will have multiplier effects, benefitting the overall economy. A cut in income tax rates should also be looked at as well.
But there are multiple factors that will hold the government back. Over the years, the contribution of corporation tax to India’s tax revenues as a percentage of GDP has gone down.
Any increase in the corporation tax rate would be embarrassing for the government now. This has put pressure on increasing the collections of other taxes like personal income tax and GST.
Further, the cash distribution schemes launched by different state governments will put greater pressure on the Union government to earn higher taxes.
So, that will be another factor holding back the government from cutting taxes. Also, the government is still trying to bring down the fiscal deficit from the high levels it reached during the pandemic.
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Finally, given how narrative-focused the current government is, any cut in taxes would mean admitting that its investment-driven strategy to drive economic growth hasn’t really worked, and that perhaps makes cutting taxes a non-starter.