Can the Budget significantly boost rural consumption?

Budget 2024

By Tushar Pradhan, Director Hxgon Partners LLP, Chief Investment Mentor, Epsilon Money Group

As the markets have demonstrated, the real economy is the base on which the capital markets move. Unless profit growth becomes structural equity capital markets find it difficult to sustain themselves. In the past few months, the meteoric rise in valuations have prompted many to ask whether this can be sustained via a robust growth in the economy alone or are other measure necessary to boost sentiment.

The Union Budget presented on July 23 is a reflection of a quiet confidence that the government is demonstrating regarding achievement of such robust growth. The estimate of real GDP growth remains strong and the estimated fiscal deficit was budgeted at 4.9 percent, a number much anticipated by many as a measure of continued fiscal prudence. The unsaid worry was that the government may give away some windfall gains in the form of the large RBI dividend and buoyant tax revenue growth to an electorate that signalled a not so enthusiastic a response in the recent election and present a “populist” budget.

While agriculture and rural housing did get mention in the budget with impressive allocations, the immediate impact is yet not known fully. Agricultural spends on research, natural farming, land record digitisation are all steps in the right direction but fall short of any immediate uplift to the rural economy in the next six months before the government presents yet another budget.

Also read: Budget signals first major political shift by Modi government after the elections

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Tushar Pradhan

Director|Hxgon Partners LLP

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To be fair, there are no other means than direct subsidy that the government can effect to boost the rural economy since farmers pay nil income tax and consumption taxes apply to both rural and urban consumers. Hence, it may be fair to assume that the current outlay eventually will boost consumption in the rural sector.

The government has assumed strong fiscal mathematics to demonstrate no need to stimulate demand further and the efforts to reign in exuberance in the financial markets has been by way of increasing short and long term capital gains tax, doing away on indexation benefit on gold and real estate and proposing an increase in STT (Securities Transaction Tax). In the long run, we expect lower borrowings to bring down cost of capital and in turn help the economy by bringing down the cost of capital to borrowers across the spectrum.

Also read: A tale of two numbers, fiscal target buoys markets, tax on capital gains a dampener

Efforts to boost rural and urban housing by allocation of three crore new houses is encouraging. Assuming some of the MSME’s are located in rural areas, the credit measures announced to support the same will indeed provide much needed support to employment and enhancing rural incomes.

Overall the budget continues on the path of ensuring progress for all “sabka vikas” and does not veer away from the path of fiscal prudence and at best is a vote for continuity in the thought process outlined in earlier budgets.

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