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Non-farm, services sectors will drive consumer income and spending, says DK Srivastava of EY India

Parvatha Vardhini C | Updated on February 09, 2020 Published on February 08, 2020

The overall impact of the personal tax rate revision is likely to be marginal: DK Srivastava, Chief Policy Advisor, EY India

Though the Budget did not provide any direct boost to consumption, DK Srivastava, Chief Policy Advisor, EY India, says the government’s move to create investment demand will ultimately lead to capacity additions for the industry as well as higher demand from consumers. Excerpts from an interview:

In times of a slowdown, should an investment boost precede a consumption boost, or vice-versa?

In the present context, the slowdown is driven by both structural and cyclical factors. There has been a persistent fall in the investment rate, but more recently, private consumption has also fallen.

Both these problems can be addressed by one single instrument — investment demand. Boosting investment demand adds to consumption demand as well as to capacity.


The government has proposed to take a lead on this front by increasing non-defence capital expenditure, which is budgeted togrow by 25.1 per centin FY21 over the revised estimate of FY20. In the medium term, the National Infrastructure Pipeline aims to boost investment demand. These initiatives will positively impact sectors such as construction and real estate and, to some extent, services such as education and health where infrastructure expansion is planned.

A second channel for boosting demand, which has been proposed in the Budget, is to offer additional protection to a select set of industries by increasing customs tariffs on final goods. The sectors include footwear, furniture, electrical appliances and machinery.

Considering that the government is aiming at removing all tax breaks and deductions — which in turn could put more money into the hands of citizens — will India follow the US model of becoming a consumption economy over the long term? How will this impact savings?

The revised rate structure of personal income tax does not appear to be unduly attractive and there may be only a limited number of takers for this option.

In any case, the government has budgeted for a revenue loss of only ₹40,000 crore on this account. The overall impact of the personal tax-rate revision is likely to be marginal.

In the foreseeable future, India is not likely to become a consumption-based economy like the US. In fact, the saving rate may actually increase. Some of the additional disposable income in the hands of the individuals may translate into additional savings.

The additional profits in the hands of the private corporate sector due to the massive concessions given through the corporate income-tax rate reforms may also have a positive impact on savings.

What have been the trends in farm vs non-farm revenues for the rural population? Where will the trigger for rural consumption come from?

Farm revenues and incomes have been growing at rates significantly lower than non-farm incomes.

The average rate of growth in the agriculture sector from 1970-71 to 2019-20 has languished at 2.5-3 per cent. Non-farm incomes have grown at an average rate of 5-7 per cent during the same period.

By and large, it is the non-farm sector that would lead income and demand growth, as also the growth of the government’s tax revenues.

What are the drivers of urban consumption currently?

The pattern of consumption in urban areas has been shifting away from demand for food and necessities towards consumer durables, technologically advanced services based on mobile and internet, and so on.

Within the basket of food items, there has been a shift towards high-protein items including milk and milk products as well as fruits and vegetables. This changing pattern is likely to continue and urban demand will move more and more towards services rather than goods.

Are traditional segments of the economy that had supported income growth for urban India set to change?

In the last 20 years, urban incomes were supported largely by sectors like textiles, footwear, furniture, furnishing and, to some extent, metals, particularly utensils and traditional art and crafts. Growth in these industries are likely to stagnate.

Instead, there will be high growth in telecommunications, entertainment as well as health and education services. Banking and financial services will also provide relatively higher growth to urban consumption and incomes.

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Published on February 08, 2020
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