The Change

The Budget has limited direct giveaways for the middle class, but has showered the rural consumer with both direct and indirect benefits. The promise to double farm incomes in five years suggests that the government may continue with its recent policy of generous hikes in Minimum Support Prices for critical crops. The higher-than-budgeted spending of ₹47,000 crore on MGNREGA in FY-17 and the decision to peg this year’s allocation higher will directly bolster rural consumer wallets. The ₹36,000-crore increase in Budget outlays for rural road building, electrification, housing and employment may create rural jobs and improve living conditions for rural folk. But it is unlikely to have any immediate trickle-down effect on rural spends.

The reduction in personal tax rates at the lowest bracket puts an additional ₹15,500 crore in the hands of lower-income consumers. That’s not a big deal, given the size of the consumer market in India. The new surcharge of 10 per cent on those earning ₹50 lakh to ₹1 crore will also appropriate ₹2,700 crore of those gains.

The Background

With private spending bringing in 55 per cent of the GDP (₹67 lakh crore at constant prices in FY-17), consumers are the single biggest moving force behind the economy and the prospects for India Inc. But the growth in private consumption slowed from a healthy 7.6 per cent in FY-16, to a sluggish 6.5 per cent in FY-17. This is without accounting for the impact of the note ban. The withdrawal of high-value currency notes and the cash crunch that has followed has taken a toll on consumer confidence in the past quarter.

Early-bird results from corporate India show that demonetisation has delivered a sizeable hit to rural spending, even while urban consumers have weathered the shift well. In segments such as home appliances and low-ticket FMCGs, the note ban has also speeded up the shift from unorganised and unbranded players to the branded (and listed) players. GST will further speed up this shift.

The commentary from large consumer companies also suggests that normalcy in consumer spending, for the organised segment, will return within the next couple of months.

The Verdict

While the Budget hasn’t proposed big giveaways to the middle-class, its feel-good provisions may succeed in boosting consumer sentiment.

The recent withdrawal of ATM limits and predictions from the Economic Survey that re-monetisation will be completed quickly, are also positive for spending. The only wild card factor is the sales decline and job losses being reported at SMEs, which can dent consumer spending over the next few months. Hopefully, rural feel-good and lower taxes for smaller companies can counteract this impact.

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