How can the Budget give consumption a spark? A checklist

Sachchidanand Shukla

There has been a tectonic shift in the growth narrative in India. A so-called perpetually supply-constrained economy suddenly finds itself in the vice-like grip of demand deficiency across the board.

Let us look the backdrop first. Indian households have witnessed a 5 percentage point fall in their income growth post FY12 compared with the levels seen during FY06-12. Consumption has slowed too, but not at the same pace as income, owing to increased availability of debt. We estimate household debt (from institutional sources) up at close to 43 per cent of disposable income in FY19, from 37.3 per cent in FY15. It is thus important that the Budget addresses the stress seen in household balance sheets.

Now, how can the Budget address consumption demand specifically? It could look at propping up both demand as well as supply sides.

In economic policy-making, demand side interventions tend to influence output, employment and inflation, using fiscal and monetary policies. Let us look at the fiscal side first considering that the best of monetary policy is probably behind us.

Given that FRBM (Fiscal Responsibility and Budget Management Act) targets on the fiscal deficit are most likely to be breached in FY20, one of the starting points to address demand side wrinkles could be by reviewing the goal or putting it in abeyance invoking the exigency clause for now. Once growth is back, the government can go back to a gradual, but surer, glide path of fiscal consolidation over the next few years.

• There is a case being made against income tax cuts and in favour of increased transfers to rural and agri sectors through schemes such as the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and the PM-Kisan. However, we believe that these options should not be viewed through a binary lens. There is a case for both these measures simultaneously — albeit in a limited manner — as they provide relief to different segments of the economy. While the tax cuts will boost urban demand, increased PM-Kisan transfers or MNREGS allocations will help prop up the farm economy. Both these segments are undergoing stress.
• Given fiscal limits, any cut in the personal income tax must be targeted (at low-mid income earners) and not across the board. Also, lower income individuals will have a relatively higher marginal propensity to consume (MPC) vis-à-vis high-income earners, implying a larger share of the increased disposable income being consumed rather than saved.
• The government could consider waiving income tax on individuals with a taxable income of less than Rs 5 lakh altogether. Currently, there is a tax of 5 per cent on income in excess of Rs 2.5 lakh on this segment. As per data on I-T filings for Assessment Year 2018-19, there are  some 3.15 crore individuals with a taxable income of less than Rs 5 lakh (excluding those earning less than Rs 2.5 lakh per annum who are exempt from income tax). The average returned income (total income after chapter VI-A deductions) of such individuals amounted to Rs 3.4 lakh in AY 2018-19 — implying an additional disposable income of Rs 8,150 per such individual after the tax cut. This would induce a fiscal cost of Rs 30,000 crore.
• The government had budgeted for Rs 75,000 crore for the PM-Kisan scheme in FY20 — to provide farmers Rs 6,000 in three equal instalments during the year. However, it is expected to save Rs 30,000 crore as many states have not yet enrolled for the programme. The official website shows that 7.5 crore farmers received the second instalment in November 2019 — this is half the number of the estimated beneficiaries. Given the current state of affairs, even if the government were to raise PM-Kisan payments by a third to Rs 8,000 per annum (such that payouts are equivalent to gains due to income tax cuts), it would still not exceed the amount budgeted for FY20. However, it should make some operational changes — by providing payments in two instalments (instead of three), with the first instalment at the beginning of the fiscal.
• It is important to highlight here that the PM-Kisan transfers only benefit farmers who own land. Wage labourers account for the larger share of workers in the rural economy. The only way that the government can directly impact their income is in the form of higher spending. It must expand spending on MGNREGA programme in order to provide sufficient income earning opportunities to such individuals. It should also hike its rural infrastructure spending and must front-load spending in the first few months of the next fiscal.

The government must use the Budget to address some structural issues in the economy. The strength of household balance sheets is a function of income and wage growth, which in turn depends on employment opportunities and job creation.

It could also look at replicating the recent success seen in telecom exports in other low-skill labour intensive sectors such as garments, shoes and the like in order to generate sufficient jobs in the medium term.

(With contributions from Rahul Agrawal)

Sachchidanand Shukla is Chief Economist, M&M Group. Views are personal.