“A society in which consumption has to be artificially stimulated in order to keep production going is a society founded on trash and waste, and such a society is a house built upon sand.”

                                                                        Dorothy L. Sayers

By Haresh Soneji, CNBC-TV18

Monday, the fate of the economy will be sealed. Pranab Mukherjee, Union Finance Minister, will lay down the growth agenda for the economy. Yes, growth. This is evident from the fact that Prime Minister Manmohan Singh has always focused on the growth agenda along with rural development including healthcare and education for the masses. The single outline therefore is inclusion of the economically backward society – for no nation can march ahead with a majority of the people not enjoying the fruits of development. The political will appears to be there with Sonia Gandhi sternly gauging the performance of UPA members. Without even seeing the Budget document, it is fair to assume that there will be a thrust on infra, sops for the poor, focus on increasing agricultural output and education. What does all this mean to us – the middle income group – MORE TAXES.

You read it right – more taxes. One may wonder why more taxes when India Inc. has been continuously demanding tax concessions. But remember, the present government has time and again hinted that it is against tax holidays. The Economic Survey, released Thursday, laid a wish list to eliminate FBT (Fringe Benefit tax) among others. So, while your FBT may be done away with, there is bound to be another instance of tax on India Inc. The focus on infrastructure is evident with the urgency with which infra and construction companies are closing QIPs (qualified institutional placement) these days. Big bang thrust on infrastructure is a given. And India Inc. knows it ahead of the budget and its generating cash for the government tenders for PPP projects.

For the common man, increasing the disposable income will lead to inflationary scenario. The government is thus in a Catch-22 situation. It has to decide what is best in the interest of the economy for even the stimulus package had has little impact on consumerism.

The Indian consumer is yet reluctant to spend his/her hard earned money. The trend is evident from the CNBC-TV18 Boston Analytics Consumer Confidence Index survey for June which stood at 72.8 versus 71 in May. The combination of improving economic outlook, improvement in pessimism about employment conditions, strength in optimism regarding household income and personal financial conditions along with a newly installed government promising economic reforms to stimulate the economy has lead to a bounce in consumer confidence in June.

The confidence surge in June was factored in considering the May survey was conducted prior to the General Elections outcome. However, the small surge is a disappointment considering the all round buoyancy noises heard from India Inc. and the government. The Indian consumer is concerned that inflation for him/her is not going to moderate any time soon. This is evident from the sentiment component over prices of goods and services, which inched down 6% in June. 50% of the respondents were also worried about interest rates, which they felt will rise from the current levels.

But, the general state of euphoria has little impact when it comes to consumerism. The long term trend however continues to remain negative and the current bounce should not be viewed as a change in trend. Also, while the benchmark index – the CNBC-TV18 Boston Analytics Consumer Confidence Index – for June showed a 2.5% up tick over May, the consumer spending component of the index slipped 4.7% in Jun, down for the fourth consecutive month.

This is a worrisome sign for India Inc. as consumers refuse to spend on discretionary items. In the previous months, India Inc. has exhausted its inventories. It now sees buoyancy in demand and has started ramping up production. But, it ain’t selling as yet. Here is quick check. Malls are flushed with discounts offered, yet the footfalls to conversion continue to remain low. With big discounts, there is an impact on margins too.

Increasing consumerism and keeping a tab on inflation should therefore be the key strategy for the Union Finance Minister. But, if the fuel price hike is any indication the government seems to be little concerned over inflation. The hike would increase the WPI to positive territory in two weeks with CPI hitting near 20% again. Prices of essential commodities have already started hitting the roof. Retail price of tur dal for instance is up 25% from Rs 60/kg to Rs 75/kg in less than a month. So, what is the government trying to do?

Finally, the equity market traders are all living by the day as the benchmark indices continue to be in a trading range. In the cash market, volumes are dismal. Open interest in the derivatives segment does not show activity building up on the underlying benchmark. Open interest is around the average levels of the previous six months. Speculators and traders are not betting on the budget. Several money managers I spoke to during the week mentioned the budget is going to be a non-event. One of them mentioned, expect announcements outside the budget in bits and parts. But, most of the mangers believe market should give way to some correction in the benchmark indices with mid caps correcting faster. The general consensus is a 2,000 points correction on the Sensex during the month. Fundamentally, valuation continues to remain high. The capitalization of MTM losses is not factored in by the market. If the AS11 was not implemented, India Inc.’s bottomline would be down by Rs 7,000 cr. That is a big hole. The Jun quarter numbers will continue to see negative to flattish growth.

Most of this is known. The sell-side analysts are all working towards talking the market up. Hopefully, the Union budget should give them an opportunity to do so. Next week, the action will shift to earnings. The real test is however consumer spending. It’s still declining for the moment as s/he continues to save for the rainy day.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs (Employee Stock Ownership Plan) granted by the employer.