Wednesday, August 10, 2022

India’s 2021 Budget: Can the Government Help Consumers Spend More? | Business and economic news

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Anurag Katriar ran a chain of 25 restaurants across India before COVID-19 hit last year. In mid-March 2020, he was forced to shut them all down as the country entered one of the world’s toughest lockdowns to control the spread of the virus.

Even after lockdowns began to ease in stages from June 8, Katriar decided to permanently close nine of its outlets. Nine more are expected to reopen soon, but with significantly reduced employee numbers, and he says he’s yet to decide what to do with the other seven.

Katriar says he’s hoping for what he describes as “last minute oxygen” for India’s restaurant industry in the government’s budget, which is due to be released on Monday.

“The past year was like a bad dream and it created an existential crisis for all of us,” Katriar, CEO of deGustibus Hospitality and President of the National Restaurant Association of India, told Al Jazeera.

“It has not been easy to stay closed for so many months and start with so many restrictions,” he said, referring to caps on the number of people allowed in restaurants, hours of operation. shorter opening times and an initial ban on the sale of alcohol.

But catering is not the only sector in need of help. Finance Minister Nirmala Sitharaman is under pressure to spend big to create jobs and boost consumer demand, boost healthcare and education, and improve the country’s creaking infrastructure, from its rail network to the industry. Energy.

But getting the country out of the hole it fell into as a result of the coronavirus crisis is likely to be one of the most difficult challenges facing any Indian government in modern times, given the deep structural issues. that the country knew even before the pandemic struck.

‘Bruised and beaten’

Sunil Sinha, senior economist at India Ratings, a unit of Fitch, says the pandemic has left businesses and households “bruised and battered” and “unlikely to return to their normalcy anytime soon.”

Interior of Indigo Deli, one of the restaurants owned by Anurag Katriar, CEO of deGustibus Hospitality and President of the National Restaurants Association of India [File: deGustibus Hospitality via Megha Bahree]

The task of restoring economic sentiment lies with the government, and although it has partly succeeded in increasing supply chains and industrial production, he added, it has so far failed to revive demand which is ultimately what is needed to support industrial production. “That’s what was missing. Unless the government does something important in this regard, the recovery process will not accelerate, ”he told Al Jazeera.

Part of the problem the government faces in rolling out large spending initiatives is that the economy is expected to have shrunk by a huge 7.7 percent during its current fiscal year, which runs from April 1, 2020 to March 31, 2021, according to the government’s estimate.

In its economic report released on Friday, the government said it expects the economy to rebound by 11 percent in the next fiscal year.

The 2020-2021 slump takes into account a strong economic rebound over the past two quarters as lockdowns have eased. But a deeper look reveals the unbalanced nature of the bounce.

Government spending, agriculture and power generation are about the only parts of the economy that are likely to have recorded positive growth during the year, according to the estimate. Everything else, including private consumption, long-term investment, trade, mining, manufacturing, construction and services, continue to decline.

Due to the shrinking economy, the government has to spend far more than it receives on taxes.

Sitharaman has announced four budget bailouts since March. In total, the government spent 6 trillion rupees ($ 82 billion), or nearly 3% of India’s gross domestic product (GDP).

But that’s below average spending on COVID-19 relief measures of around 4% of GDP in emerging countries and middle-income economies, according to the International Monetary Fund’s Fiscal Monitor database ( IMF) on how governments are responding to the crisis. It’s also lower than China’s response, which accounts for around 5% of GDP, and well below the average of around 10% for advanced economies.

Nirmala Sitharaman, Minister of Finance of India, predicts a strong economic rebound in the next fiscal year [File: T. Narayan/Bloomberg]

Even though Sitharaman wants to spend aggressively to fix the economy, several interrelated issues stand in its way.

Although unemployment has fallen sharply from a peak of 23.5% last April, it remains at 6.5% and urban unemployment stands at 8%, according to a 30-day moving average estimated by the Center for Monitoring Indian Economy.

High unemployment limits the amount of tax revenue the government can collect. Even before the pandemic, only around 14.6 million people paid any income tax, according to the Income Tax Department. At just 2% of the population, India’s tax base is much smaller than 12 percent average for middle-income countries, according to World Bank estimates.

Low tax revenues mean that the government’s budget deficit – the shortfall against spending for a given period – is expected to increase. A survey of economists by the Bloomberg News Agency suggests that the deficit for the year at the end of March will be 7.25% of the size of the Indian economy, compared to the government’s plan to limit it to 3 , 4%. Indian law stipulates that the deficit cannot exceed 3% of GDP.

In the wake of the soaring deficit, some economists say the government must keep spending under control, even though millions of people are still suffering from the effects of the pandemic.

‘Don’t expect anything’

“This budget needs to look at fiscal consolidation,” Madan Sabnavis, chief economist at CARE Ratings, told Al Jazeera. CARE expects the deficit to reach about 8 percent of GDP this fiscal year.

The finance minister will need to set a “road map” for how he will more than halve the deficit over the next four years, Sabnavis said.

“We can all expect great things. Every sector wants something. But practically, don’t expect anything because all the policies have been announced.


To cover its budget deficit, the government has to borrow money, mainly by issuing bonds. This adds to the national debt, creating even more headwinds for the government.

“Record public debt levels limit room for maneuver for additional fiscal support, especially in countries where borrowing costs or access to finance impose constraints,” says the IMF in its latest edition of the Monitor . “However, much remains to be done to avoid a sharp increase in poverty and income inequality, and to promote a strong recovery amid heightened uncertainty. Fiscal policy will have to offer more with less. “

India’s public debt is certainly high even among emerging economies, accounting for nearly 90% of GDP, according to IMF estimates for 2021. China’s is estimated at 66.5%.

But some economists disagree that the government should limit spending at such a critical time in Indian history.

Sinha, of India Ratings, recommends that the government be “a little less fiscal conservative” and undertake a judicious combination of direct financial support to the poorest while also spending on infrastructure projects that have a period. of rapid turnover, such as roads and houses in rural areas. as well as low cost housing in urban areas. These projects will immediately create jobs, the money of which could be spent on food, groceries and other basic necessities, thereby boosting the economy.

The last mile?

In addition to its COVID-induced balancing act, the government has other pressing issues to address. Most visible of these have been the thousands of farmers who have been protesting for weeks against the country’s new farm laws.

Farmers staged weeks of protests in Indian capital against new farm laws [File: Sajjad Hussain/AFP]

The government is likely to include an aid package for the agricultural sector “given the immediacy of the protests”; and to get the private sector and households to consume more, Barclays India economist Rahul Bajoria told Al Jazeera.

Business owners and their employees working in industries such as the hospitality industry, which have been among the most affected due to restrictions on face-to-face interactions, are also in desperate need of increased government assistance.

The Grand Hotel in the Indian capital, New Delhi, is one of many to have suffered. When the country went into lockdown, travelers staying there were stuck. But other than them, the hotel had no business for April, recalls General Manager Vipul Kamboj.

Eventually some revenue started pouring in when the government asked most hotels to make a few floors available for those who needed quarantine. Hotel workers who chose to return home were allowed to keep their jobs but were considered on leave without pay and there were pay cuts across the board.

Today, some business trips have resumed and weddings are taking place again. But with a New Delhi cap of 50 people at any gathering, the hotel’s revenue is barely 25% of 2019 levels, Kamboj says.

“We have good banquet halls, a large outdoor space that can accommodate 700 people, but when only 50 guests are allowed everyone feels lost,” he told Al Jazeera.

“The hotel sector can be a small income for the government, but if you look at all the auxiliaries [such as] the guides, the taxi drivers, the roadside restaurants, the shops selling trinkets, it all depends on the hobbies and they are all affected.

India launches world’s largest vaccination campaign [Dinuka Liyanawatte/Reuters]

Kamboj’s request to the government is to relax some rules for the industry, including allowing hotels to serve alcohol outside and a relaxation of excise taxes – a major expense – for a year or two.

But now there is light at the end of what has been a long, dark tunnel.

As India now rolls out the world’s largest vaccination campaign with plans to vaccinate around 300 million people by August, most companies are pinning their hopes on a medical intervention to bring demand back to where it was before. the pandemic.

In a note to Al Jazeera, Barclays’ Bajoria says if the immunization plan stays on track, as he expects, India will see ‘the final unlocking of the economy’ begin during the fiscal year ahead and contribute to the recovery. during the six months ending in September.

He expects the economy to grow 8.5% in FY2021-22, a more optimistic projection than his previous forecast of 7%, albeit from the battered base. of this year.

“A manageable health crisis, as well as the start of the vaccination campaign, should give a major boost to the economy over the next year,” the note said.


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