Reviving consumer demand needs to take priority in policy responses to the pandemic

The demand destruction caused by Covid is the biggest challenge for members of India Inc looking to normalise operations after the crisis, Chief Executive Officers (CEOs) of leading companies admitted in a recent survey conducted by BusinessLine . CEOs also played down concerns about disrupted supply chains, labour shortages and a working capital crunch, underlining that a shrinking topline was presently their biggest pain point, making cost management difficult. Only a fourth of the firms expect their revenues to automatically revert to their previous growth trajectory once Covid abates; a fifth of them are bracing for a 20-50 per cent hit to offtake. Given that this survey covered Nifty50 constituents and their large unlisted counterparts — companies which boast of strong brands, deep pockets and entrenched distribution — the findings are a clear indicator to the recessionary trends that may lie in wait for smaller firms post-Covid.

While the findings are not surprising given the damage to income and job prospects, they do offer three takeaways for policymakers. One, as more States grappling with rising Covid numbers take the easy way out by announcing lockdown extensions, they’re likely underestimating the lasting economic harm they’re inflicting on their constituents with this on-off approach to business activity. Even if the larger members of corporate India manage to survive such disruptions by belt-tightening, small and mid-size businesses, which make up over 90 per cent of Indian enterprises, may face high mortality rates. Opening up retail outlets and e-commerce deliveries for ‘non-essential’ goods is now critical to provide demand visibility to floundering businesses. Two, firms that are struggling to stay on their feet amid shrinking revenues are quite unlikely to avail themselves of cheap borrowings or collateral-free credit. Stimulus that takes the form of monetary packages devised by the RBI and the MPC will, therefore, be of limited efficacy in reviving the economy right now. Three, fiscal relief from the Centre has so far focussed on enabling subsistence for the poor with cash/foodgrain doles. But the bulk of the demand for consumer products and services in India originates from the middle and the upper middle classes. Without measures to alleviate pain for them, a consumption revival may remain a pipe-dream.

The Centre may like to consider three sets of measures. Passing on savings from recent oil price declines through fuel price cuts may put money directly in consumers’ hands. Rolling out an urban version of MGNREGA may help, too. The Centre must also consider rationalising income tax slabs by cutting back on cesses and surcharges that have a cascading impact on higher incomes. Taking a less dogmatic approach to ‘demerit’ goods under the GST can help get the larger cogs of the economic engine going. Yes, all these measures will entail short-term sacrifices on tax collections. But a demand revival is the only way to prop up tax collections for good.

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