Demand-side Interventions To Kickstart The Economy

The Indian economy is facing challenging times, amidst a growth slowdown and sluggish economic activity. The Union Budget, to be presented on 1 February 2020, would provide a strong policy direction to help reverse the present situation. 

The government has intervened regularly in the last few months to boost growth with measures such as reduction of corporate tax rates, easing of foreign investment rules, ease of doing business reforms and the most recent announcement of Rs 102 lakh crore worth of infrastructure projects to be implemented over the next five years, among others. The Budget can place attention on-demand creation as supply-side measures alone cannot adequately address the current economic scenario. In this context, CII has come out with a blueprint to boost demand in the economy. 

Rural demand is a crucial component of overall demand and CII has recommended a three-pronged approach to stimulate the rural sector. First, rural income must be raised through job creation outside agriculture. Labour-intensive sectors in manufacturing e.g., textiles and food processing, as well as construction, need to be encouraged. This must be complemented with enhanced skill development programmes to create a productive workforce. 

Increasing farmer incomes from livestock activities and higher price realisation from agri-produce is recommended as a second step. A model and comprehensive National Food Processing Policy is suggested, that would align central and state policies, encourage ease of doing business, invite investments and empower farmers through job creation. 

Third, public spending on agri-infrastructure must be stepped up, especially on irrigation, seeds, cold storage and all other inputs, which in turn will improve productivity. Increased budgetary provision for strengthening the National Agriculture Market (e-NAM) is also suggested. Other recommendations include promoting Farmer Producer Organisations (FPOs), leveraging remote sensing technology for efficient production planning, and encouraging agri-exports by identifying potential products. 

The Non-Bank Finance Companies (NBFCs) and Housing Finance Companies (HFCs) are faced with a severe liquidity crunch. Given that the NBFCs and HFCs are an important source of the consumer as well as business finance, infusing greater liquidity to these institutions will play an important role in reinvigorating demand. Unlike banks, these institutions do not have the repo window facility to borrow in times of need. The CII has, therefore, recommended that the facility of  ‘lender of last resort’ may be considered for such institutions, particularly those which have an asset book size greater than Rs 25,000 crore. 

To further encourage credit flow towards affordable housing, the end-use norms for raising external commercial borrowings (ECBs) by HFCs may be relaxed. Further, for investment-grade rated companies, the ECB limit should be raised to $1,500 million from the current uniform limit of $750 million for all NBFCs. Granting of infrastructure status to integrated townships and the housing sector and an independent regulator to set standards and tariff policies, would also stimulate construction activity and jobs.

Given that the household stock of gold in India is valued at over $1 trillion, the CII recommends expanding formal gold pledging which can encourage investments into more productive assets. A key measure to infuse consumer confidence would be to reduce personal income tax rates. This would enhance disposable incomes, stimulate spending and increase household savings. 

With an emphasis on consumption and investment, the forthcoming Budget would put India on a stronger growth footing.

Chandrajit Banerjee

Guest Author The author is Director General, Confederation of Indian Industry