May 18, 2020
“Without continual growth and progress, such words as improvement, achievement, and success have no meaning” – Benjamin Franklin
Yesterday the Finance Minister doled out her fifth and the last tranche of the 20Lakh crore economic package to lead the economy out of the current corona crisis and fire its growth engines. PM in his address to the nation on 12th May had laid lot of emphasis on Self Reliant India. And this package seems to be addressing the same to a good extent.
It had almost all the provisions that industry had been asking for quite some time and also a desire to push SMEs on path of growth including micro enterprises. But does it serve the purpose of the moment – we think a lot has been left to be desired.
Presently it’s not the question of lack of money with businesses that has put them on the path of degrowth, but the lack of demand or consumption. Now we are in lock-down v4.0 and a lot of activities have been allowed including the sale of goods by eCommerce companies. It will be seen with great keenness how the demand for non-essential items pan out over next 2-3 months.
Honestly we are not very optimist on the same. This package has lot for the businessmen, farmers, and the poor, but middle class who is the backbone of the demand for non-essential goods is using lens to see what is there for them in this package. The package has doled out many things that will positively increase the supply but on the other side of the curve is demand. This is the area which needed more attention and which our FM has failed to capitalize the situation for.
Traditionally it’s the middle class who drive the demand. In their pursuit to raise their standard of living with increasing income levels they start incurring debt – not to increase their productivity but to buy more comforts and on entertainment. Most of the middle class people haven’t maintained buffer of contingency funds to meet the kind of situation they are into despite having been earning enviable salary packages.
Middle class is a major segment of Indian population and majority of it comprise of salaried class and self-employed professional. Corona crisis had exposed them to the vagaries of unemployment that a private sector employee is always exposed to. Even the self-employed have seen a big dent on their cash flows. It has forced them to rethink on their spendthrift habits and saving strategies.
Now things will change significantly if not dramatically. They will be more focused on saving rather than spending so that they not only maintain their living standards but also meet their EMI obligations for good long period of unemployment or under-employment. This will adversely impact the demand in the economy and in the absence of demand such large package will hardly mean anything.
What could be done for Middle Class – Some of the measures that government should consider that we believe will boost the confidence of the middle class and will positively reflect on demand are:
a. Rationalize direct tax rates to leave more money in the hands of taxpayers of middle class earning upto 25lacs p.a. Reduction in TDS rates mean nothing as the tax has to be paid anyway.
b. Paying interest for the moratorium period for the middle class. Government may consider only home and education loans if not all the loans for this purpose. And as for eligibility conditions, government may define a limit of income reported in the last ITR, cibil score etc.
c. It should suspend long term capital gains tax on equity at least for five years if not removing it totally.
d. Provide sales linked incentives to SMEs and micro enterprises to encourage them for more sales at lower prices as is being done by countries like China & others.
e. Introduce social security schemes exclusively for the income tax payers. May start with providing term insurance for a sum assured that is multiple of their gross or net taxable income or tax paid as per last ITR filed.
f. Instruct its executives at the lowest level not to harass small entrepreneurs in the name of violation of rules but to sympathetically review the reason of violation and also use warning before penalizing them.
g. And may think of other measures that will bring confidence in the middle class that they can sustain such periods in future as well despite lesser income for good time.
Providing liquidity and loans at cheaper rate is good and will reduce the cost of production for the manufacturers, but if they don’t have buyers in the market then their cheap good quality products will fetch nothing nor to the entrepreneurs neither to government. But outstanding debt and unpaid interest will keep increasing which will put both the parties in uncomfortable positions. So the government need to think on the other side of the curve and find ways to increase demand and also think of the middle class who is major vote share of the current regime.
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