Moneycontrol Pro Panorama | Why a parent’s wallet is greater than uncle’s gift

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In an Indian household, a barrage of relatives arriving for festivities is a common occurrence. There is usually one one uncle or aunt who is extra generous with gifts, often extending to non-festival times as well.

But make no mistake, that generous aunt or benevolent uncle's munificence cannot replace the steady stream of income and support from a parent. This is also the basic tenet for investment: you may have multiple one-off incomes but always protect that one stream which brings you the capital you need to invest.

Let’s blow up the household into the economy now. Fiscal and monetary policy are the prime ingredients to keep the economy working, thriving and on the path of reaching the aspirational growth goal. They are the parents. When the economy does well and has sectors with excess output, trade is the best option. That's the generous aunt or uncle. Trading partners lift each other’s economies up by making good the shortfall of one through the excess of the other. However, trading partners have their own economies to deal with and their own motivations, issues, and policies. Just like generous relatives have their own houses to fix and their own motivations to follow.

America’s sea change in its tariff policy is an offshoot of this reality. President Donald Trump’s America First campaign is at the centre of the tariff policy. For India, this has not only entailed additional pain but also resulted in a big hit to its relative strong position among emerging markets and the outlook for its own economy. We are no longer the proverbial favourite niece.

The setback need not be debilitating. It is evident that the government’s focus must be to lift domestic consumption and investment, both of which have not been doing great. The slowdown in private consumption demand has been going on since the past two years while private investment hasn’t revived meaningfully for many years now. The latest announcement of tax relief through goods and services tax (GST) recalibration is the fiscal support the economy needs.

Ananya Roy in her piece here explains how fiscal and monetary support can help offset some of the tariffs' impact, writing. “...the government’s latest measures do inspire confidence. When demand picks up pace, the higher growth would once again justify India’s premium valuation against emerging market peers. Conditional on consumption growth following suit, sectors such as Auto, Real Estate, Consumption, and BFSI would turn out to be the primary beneficiaries,” she writes.

Meanwhile, monetary policy has done its bit too. The Reserve Bank of India’s liquidity infusion is due next month, giving more money into the hands of banks to meet productive credit demand. More liquidity and the rate cuts have also kept bond yields benign, making it easy for companies to borrow cheaply.

But parents do not hand over money without conditions. After all, the goal is to make us self-reliant or as the government calls it-- Atmanirbhar Bharat. While the government has and will take measures to put more cash into the hands of the public and the RBI makes it easy for firms to get funds, households and corporates must do what comes next naturally.

Firms need to put money where their mouth is and begin to increase investments in long-term assets. Export-oriented sectors would have no motivation to increase output given the dent from tariffs and loss of markets, but other sectors can do the heavy-lifting. As such, companies are already looking at recalibration of supply chain and new trading partners to keep their factories humming.

Consumption spending hasn’t really increased despite the income tax relief from the budget in February. The potential GST relief is expected to motivate discretionary spending as taxes reduce, and lower prices.

To sum up, the reward from exports and foreign investment is now either over or on a declining trend. Our Chart of the Day shows how emerging market funds are reallocating away from India. The economy will depend on domestic policies even more than before. Since the proof of the pudding is in the eating, markets would want to wait and see the impact of these measures. In other words, will the measures inspire more consumption spending and more private investment.

The parents' wallet is now open wider than before and that should make all the difference.
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Aparna Iyer
Moneycontrol Pro