Politics Of Policy | A Demand For Demand

A recent conversation with a CEO of a manufacturing company offered me a new perspective on growth. "While many of us are seeking lower cost of credit and worried about bad loans of banks, there is a deeper cause for lethargy in business," he confided. "Most factories are running at 50-70 per cent capacity utilisation. Even if I could raise money for a new plant, there is no reason for me to expand."

This comment helped me realise what CEOs are terrified of. The lack of consumer demand is scaring CEOs more than the challenges they face in navigating approvals or seeking low cost credit.

Finance Minister Arun Jaitley is banking on growth but there is not a lot of optimism about reviving consumer demand. The impact of the efforts to build rural infrastructure will play an important role. By investing far more in irrigation, rural electrification and affordable housing, the government hopes to create a few more million consumers. Add the plan for financial inclusion using instruments like direct benefit transfer and a healthy environment can be hoped for. Agricultural credit has been promised at the highest level so far. Hundred per cent rural electrification is projected by May 2018.

If these plans work, and projects are implemented in right earnest, neglected agriculture sector and the rural economy could pick up momentum. Tax breaks on small houses would help too.

There is not a lot for sparking urban demand. Taxes on most products and services are up. There is a distinct sense of the budget worsening the expenses of the middle class in cities and urban areas. A few income tax breaks will not excite the middle class and higher burden on the rich will dampen their spending.

There is an overwhelming sense of disappointment about the continuing narrow tax base. Jaitley has taken several initiatives to improve tax administration but the tax base remains less than 4 per cent of population. Middle class knows it and resents it.

There have been some welcome measures to remove needless processes and to focus on outcome. Each new scheme will have a sunset clause and will be assessed on outcome and impact. The distinction between plan and non-plan expenditure is removed too. On transparency, the government will deploy norms of country by country tax reporting and also ensure BEPS norms to curb tax evasion.

Overall, a sensible set of policies have been announced in the budget. Unless, consumers get more money in their hands and the confidence to spend, the mood in the economy will remain sombre. The factories will remain under utilised.

There is now a strong demand for higher consumer demand.