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Budget 2021 expectations | Reducing cyclicality of rural household income may get priority

Taxing cigarettes comes as an easy alternative to garner additional revenues. Grant of infrastructure status for hotels, restaurants would lower the cost of funds.

January 28, 2021 / 02:35 PM IST
Representative Image (Source: Reuters)

Representative Image (Source: Reuters)


The central government is dealing with mounting expectations of strong reforms to stimulate growth amid a painful COVID crisis.  In recent years, the spending patterns have taken a hit due to implementation of demonetisation and introduction of GST. The COVID crisis has further disturbed the purchasing power as well as behaviour of consumers. Revival of consumption cycle remains a key priority in Budget 2021 to boost domestic growth as it forms the core of India’s GDP. Moreover, history suggests that the economy displayed robustness during the financial crisis of 2008 due to resilience in core consumption.

Core focus to be rural

2020 was, fortunately, a good year in terms of monsoon. Rural has been a mainstay of the entire FMCG basket and have led the recovery in demand following a bumper crop season last year. With majority of farmers still heavily dependent on the monsoon for their incomes, we expect an increase in allocation for agriculture and allied sectors (fertilisers, irrigation, etc.) so that dependence on rains is lowered and the cyclicality of incomes among rural households can be reduced.

Given that the pandemic has caused significant business and livelihood disruptions, the government can use the budget to announce its further intent and follow up land and labour reforms with additional policies to bring some flexibility in hiring constraints and initiate further schemes like MNREGA to encourage job creation.  The focus would be to reverse the labour migration caused by the pandemic and encourage employment for low-skilled workers within labour-intensive industries such as - textiles, housing, MSME, etc.  Besides, the government could also dole out some additional packages to offer direct incentives to the rural consumers.


Small rejigs in tax structure possible

From the budget standpoint, the rejig in personal income tax structure would be on everyone’s wish list as lower tax outgo would boost consumers’ disposable incomes and improve buying decisions, but the same appears unlikely for now as the government has limited headroom due to fiscal constraints. However, there exists some scope for inclusion of additional items for income tax exemptions. For instance, the existing exemption of 1.5 Lakh for home loan principal amount can be raised to 2 Lakh for first time home buyers.

In October 2020, the government had announced a scheme to provide travel-related tax relief for individuals. Under the scheme, the amount spent on consumer goods services could be used for exemptions under Leave Travel Concession/Allowances. Considering that travel is expected to remain subdued in 2021, the upcoming budget could see augmentation of such innovative measurers to incentivise spending and aid demand recovery.

Sin taxes could go higher

Due to the fiscal math going awry, taxing cigarettes comes as an easy alternative for the Government during these testing times. In Budget 2020, there was a sharp increase of 13 percent in tax incidence consequent to significant increase in the rates of National Calamity contingent duty. We can expect similar kind of tax hikes on sin goods, given the situation.

Palm oil constitutes over 40 percent of India’s edible oil consumption. India is the world's largest importer of edible oil and buys around 15 million tonnes annually from countries like Malaysia and Indonesia. In November 2020, the Central Board of Indirect Taxes and Customs had reduced the customs duty from 37.5 percent to 27.5 percent. Considering that the overall demand situation has stabilised somewhat, the government could roll back some of these cuts to strengthen the fiscal math.

Further support likely for core sectors

For the apparel industry which is lagging with double-digit drop continuing in November 2020, duty-free access to certain countries (such as European Union and the US) would help in boosting exports and revive the demand. For promoting Make in India, the government increased import duty on footwear in the last budget and textiles recently. Extension of import duty on other categories would benefit the industry.

For the retail sector, rollout of National Retail Policy which focuses on streamlining approvals and compliance, improving capital access and strengthening logistics would be beneficial. Increasing FDI in multi-brand or single-brand retail would enable organised players to expand presence and inculcate best manufacturing practices. While the industry may not witness much direct support due to fiscal constraints, any focused policy action outlining growth roadmap (on lines of automotive mission plan for autos) would be beneficial for long term growth.

For the beleaguered hotel industry, granting of infrastructure status would enable it to access funds at a lower cost as well as electricity, water and land at industrial rates. Also, measures like granting income tax exemption on travelling within India can provide the much-needed fillip. Also, deferral renewals periods for all permits, licences, bank guarantees and security deposits across the tourism, travel, hospitality would help. With the industry being badly hit with occupancies down to around 35-40 percent and being a significant employment generator, we expect some measures to lift the sector.

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Sachin Pal
Nandish Shah
Bharat Gianani
first published: Jan 28, 2021 02:35 pm
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