Categories: Business

‘Budget needs to focus on consumption revival’

Budget, consumption revival, Dharmakirti Joshi, FRBM committee, N.K. Singh

The budget to be presented on 1 February is being awaited by individuals and industries alike to see lower taxation on their incomes which the government itself believes would broaden the tax base of the country. While lower taxes on incomes would give a sure fillip to urban demand, rural spending announcements in the budget would also be keenly watched, as these would boost rural incomes that are needed to strengthen the nation’s overall consumption story.

“The prime focus of the budget needs to be revival of domestic consumption as it has been badly hit by the demonetisation drive,” says Dharmakirti Joshi, Chief Economist at Crisil, adding that bolstering faltering investment demand should be another priority area in the budget. Joshi feels that some windfall gains from demonetisation can provide one time fiscal space to the government (in FY18) to offer sops needed to kick-start the economy. Higher consumption is needed to address the under-utilisation of India’s manufacturing industries. The RBI’s recent survey paints a rather gloomy picture of demand conditions, especially in the running (January-March) quarter.

Higher consumption is needed to address the under-utilisation of India’s manufacturing industries. The RBI’s recent survey paints a rather gloomy picture of demand conditions, especially in the running (January-March) quarter.

Economists agree that whatever limited resources the budget provisions have, needs to be given to the needy ones. And the sectors which badly need budgetary support are the consumption-driven sectors like auto, consumer durables and FMCG etc. Real estate is another sector which can create multiplier effect on cement and steel industries as over half of cement and a third of steel is consumed by the real estate industry. So supporting these sectors, giving tax relief to individuals and industries, releasing the HRA component of the 7th pay commission along with continued focus on public investments “would certainly put government finances under pressure”, says India Ratings & Research. As per Crisil, the government needs to prune its fiscal deficit by up to Rs 35,000 crores in FY18 to bring the deficit down at 3% as mandated by Fiscal Responsibility and Budget Management (FRBM).

Many believe that the FRBM committee headed by N.K. Singh has likely recommended the range (rather than the fixed rate) within which fiscal deficit can safely be incurred. Although the range formula might still expect the government to live within its means, at the same time it would provide the government some room to offer temporary relaxations to support the economy. “So an additional spending window can be created if the target is recommended (by the committee) to be relaxed to 3.5%,” says Crisil.

Girish Vanvari, Partner at KPMG, feels that there are three conflicts that the government faces. One is populism which is thought to be required for winning elections. The second is to kickstart the economy and finally achieving these within the confines of lower fiscal deficits. And how the government resolves these issues adequately is what the budget is going to be all about.

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