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Budget 2020 | Five steps towards restoring business and consumer confidence

Loknath Das January 31, 2020 Business Comments Off on Budget 2020 | Five steps towards restoring business and consumer confidence
Budget 2020 | Five steps towards restoring business and consumer confidence

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The Indian economy is going through a difficult phase. The International Monetary Fund (IMF) has lowered India’s growth estimate to 4.8 per cent for 2019-20. According to the Consumer Confidence Survey of the Reserve Bank of India (RBI), consumer confidence in the economy is at a five-year low and the consumer spending is declining. While overall unemployment rate is manageable at 7.5 per cent, the unemployment rates are over 42 per cent among the youth. This is despite several initiatives and reforms taken by the government including the ‘Make in India’ initiative and implementation of the GST.

This slowdown is unique as it is not associated with high inflation or falling Sensex or serious currency depreciation as has been in the past. Further, while India has been continuously improving its rank in the World Bank’s Ease of Doing Business Rankings of the World Bank (from 100th position in 2017 to 77th in 2018 and 63rd in 2019), domestic and foreign firms continue to complain about the lack of ease of doing business. With a fear of budget deficit at a time when a number of critical sectors are in need for finance, this is going to be one of the most challenging budgets, which has the twin responsibility to bring back (a) the growth rate to achieve the Prime Minister’s vision of making India a $5 trillion economy and a global economic powerhouse by 2024-25 (b) regain investors, businesses and consumers confidence.

There are a number of reasons why good policies have not given good results. These have to be addressed. There are five low hanging fruits, which the government can focus on to get good results. First, there is a need to review the GST rates and reduce them in select FMCG products. In a number of food and essential products such as detergent, shampoo, butter, ghee and Ayurveda medicines, the pre-GST rates were much lower than the post-GST rates. Ideally for such products, the GST rates should not be more than 5 and 12 per cent. The GST slab of 28 per cent needs to be reviewed and only high-end/luxury products can be in that slab.

Second, while industry had asked for a lower corporate tax and got it, the benefits are yet to be seen. This is because small and medium enterprises and start-ups are facing significant issues in accessing banks and other lending institutions. It is important to ensure a better access to affordable credit as this will lead to higher investment in the economy. It is also important to focus on developing a vibrant corporate bond market to boost resource allocation for long-term projects.

In a globalised world, where manufacturing is an integral part of establishing a global value chain, protectionism, whether it is a result of the domestic policy and/or global development, will lead to slowdown. In the past three years, India has gradually altered its policy from unilateral tariff reductions to increase in tariffs to support ‘Make in India’. This has adversely affected the manufacturing sector, especially at a time when companies want to be part of the global value chain and India’s SEZ and other foreign trade policies are being challenged at the WTO.

It is important to understand that India’s major exports depend on certain imports, both for goods and services. Any measure to raise tariffs should take into account its impact on domestic industry as a whole and not the interest of a select few groups.

Fourth, while consumers are looking forward to a reduction in personal income tax, businesses are waiting for a comprehensive direct tax reform, which includes tax administrative reforms. Significant control and policing by the tax administration has been cited as one of the key reasons for loss of business confidence. The budget should focus on increase in spending by consumers, especially rural consumers, who have been a key driver of growth.

Last but not the least, a budget cannot be in isolation. It has to be linked with other policies of the government. For example, while the government wants to promote organic farming and exports and subsides are given for organic farming, import of organic raw materials are banned by the Food Safety and Standards Authority of India (FSSAI).

India has the largest number of organic farmers in the world and Indian companies would like to be a part of the organic value chain. Yet a survey by the author of 90 companies show that many of them are not investing in India due to the restrictions on imports of key raw materials and ingredients. The government needs to align its vision and mission with policies and targeted financial incentives so that India can be a part of the global value chain in sectors such as organic food.

[“source=moneycontrol”]

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