Fattening the consumer’s wallet

Given that private consumption accounts for 57 per cent of India’s GDP, it is easy to grasp why the Finance Minister has put more money into the hands of the consumer, even while being quite stingy with his sops to India Inc. Unless consumers resume their big-ticket purchases of automobiles, white goods and property, he knows, reviving economic growth will remain a pipe dream. Private spending, which was growing at nearly 8 per cent a year until 2011-12, has slowed to 5 per cent in 2012 to 2014. Therefore, there are three legs to his budget proposals which seek to fatten the consumer’s wallet and to induce him to spend.

For one, the increase in the basic income tax exemption limit from ₹ 2 to ₹ 2.5 lakh for the ordinary salaried and from Rs 2.5 to Rs 3 lakh for senior citizens will allow these taxpayers to save about ₹5,150 on their annual tax outgo. In total, direct tax giveaways are expected to put an additional ₹22,200 crore into the hands of the salaried. All the indirect tax proposals put together levy an additional ₹7,525 crore, suggesting that consumers are fairly big net gainers from this budget. Two, the budget grants an additional ₹50,000 exemption to the individual tax payer on the interest paid on his housing loan. This could save home owners anywhere between ₹5,000 and ₹15,000 a year in taxes, which they are now free to blow up on cars, SUVs or white goods.

In fact, the sop to home-buying, taken with the earlier excise duty extensions on automobiles and consumer durables, is a clever move designed to make sure that consumers who are putting off their big-ticket purchases are prodded into action. This apart, import duty cuts for inputs into soaps, personal computers and smaller LCD TVs should make these products cheaper by a bit, boosting demand.

Finally, the FM’s decision to maintain allocations to MNREGA, go ahead with the Food Security Bill and start up umpteen projects to improve rural infrastructure and enhance access to the internet should also give a boost to rural spending. Yes, a bad monsoon may be a bit of a dampener here; but rising farm product prices have often been known to make up for poor output in below-normal monsoon years.

But it must be kept in mind that if the FM has been generous with his props to consumption in this budget, he does plan to pinch the consumer’s purse later on. The gradual increases in diesel and LPG prices over the next two years, to curtail the enormous subsidy bill, should see petroleum subsidies fall by over ₹20,000 crore. It is consumers, albeit the more affluent vehicle owning ones, who may end up footing much of this bill.

COMMENT NOW