Needed: A demand-boosting Budget

Given 2020 has been tough, and things aren’t improving soon, will the FM give a boost to spending?

 

Joydeep Ghosh

 

It has been a rough year for working professionals all across the world. But in a country like India, the impact has been more pronounced due to fewer safety mechanisms like doles for unemployment from the government such as the USA or other countries.   

 

The job loss crisis in India has been exceptionally high. Since April 2020, when India went into a complete lockdown due to the Covid-19 crisis, 1.89 crore (19 million) salaried people lost their jobs in the first few months, according to reports based on data from the Centre for Monitoring Indian Economy (CMIE). Out of this, 50 lakh (5 million) jobs were lost in July alone. Even its latest data shows that urban India, which accounted for 32 per cent of total employment, say 34 per cent loss of employment till December 2020. And many who were spared the pink slip took severe salary cuts. Reports suggest that many have taken over 30-50 per cent cuts in salaries to retain their jobs. 

 

Of course, after the 23.9 per cent drop in the Gross Domestic Product (GDP) in the April-June quarter, things will improve on a sequential basis (quarter-on-quarter). And with the IMF predicting an 11.5 per cent growth in 2021, there will likely be decent growth. But don’t forget that this growth comes on the back of an expected 8 per cent fall in FY21. So, if things do go right as predicted, we will probably be closer to FY20 GDP, or marginally below. 

 

So, while there will be recovery – possibly, the promised V-shaped one, the Indian economy will take at least a few more quarters, if not more, to recover. So, for the salaried, things may not improve for quite some time, and the restoration of salaries that they are dreaming off may take some more time. Till then, most need to tighten their belts. For many, it may be time to save money more diligently. 

 

With the Union Budget around the corner, there will be a lot of expectation from the Finance Minister (FM) to provide sops to boost spending – perhaps, the only way to get out of this rut. While the government has given a good boost to the industry by significant tax cuts in September 2019, it’s time for the middle-class and upper-middle-class India to get a boost to spend. After all, buying a high-end music system for Rs 1 lakh vis a vis one that costs Rs 30,000 will provide a bigger multiplier effect.  

 

Yes, the FM will have revenue concerns, as there will be a revenue shortfall in FY21 due to cut in salaries, job losses and demand shrinkage. And there would both kinds of advisors – some advising fiscal prudence with an eye on global rating agencies while others will say don’t bother about the fiscal deficit.

 

It is a tricky call. But boosting supply has run its course – no significant investments were made after these tax cuts in the absence of demand. It only improved corporate balance sheets, profits and valuations of companies. Improving demand has its challenges – there is no guarantee that a significant income tax benefit will translate into expenditure immediately. Stressed families may still choose to save more as a safety mechanism. But if they have down-traded – buying Lux instead of Dove, for example – they may find comfort in going back to the latter, for starters. 

Over to the FM!