"Without continual growth and
progress, such words as improvement, achievement, and success have no
meaning" – Benjamin Franklin
Yesterday
the Finance Minister doled out her fifth and the last tranche of the 20Lakh
crore economic package to lead the economy out of the current corona crisis and
fire its growth engines. PM in his address to the nation on 12th May
had laid lot of emphasis on Self Reliant India. And this package seems to be
addressing the same to a good extent.
It had
almost all the provisions that industry had been asking for quite some time and
also a desire to push SMEs on path of growth including micro enterprises. But
does it serve the purpose of the moment – we think a lot has been left to be desired.
Presently it’s
not the question of lack of money with businesses that has put them on the path
of degrowth, but the lack of demand or consumption. Now we are in lock-down v4.0 and a lot of activities have been allowed including the sale of goods by
eCommerce companies. It will be seen
with great keenness how the demand for non-essential items pan out over next
2-3 months.
Honestly we
are not very optimist on the same. This package has lot for the businessmen,
farmers, and the poor, but middle class who is the backbone of the demand for
non-essential goods is using lens to see what is there for them in this
package. The package has doled out many things that will positively increase
the supply but on the other side of the curve is demand. This is the area which
needed more attention and which our FM has failed to capitalize the situation
for.
Traditionally
it’s the middle class who drive the demand. In their pursuit to raise their
standard of living with increasing income levels they start incurring debt –
not to increase their productivity but to buy more comforts and on
entertainment. Most of the middle class people haven’t maintained buffer of
contingency funds to meet the kind of situation they are into despite having
been earning enviable salary packages.
Middle
class is a major segment of Indian population and majority of it comprise of
salaried class and self-employed professional. Corona crisis had exposed them to
the vagaries of unemployment that a private sector employee is always exposed to.
Even the self-employed have seen a big dent on their cash flows. It has forced
them to rethink on their spendthrift habits and saving strategies.
Now things
will change significantly if not dramatically. They will be more focused on
saving rather than spending so that they not only maintain their living
standards but also meet their EMI obligations for good long period of unemployment
or under-employment. This will adversely impact the demand in the economy and
in the absence of demand such large package will hardly mean anything.
What could be done for Middle Class – Some of
the measures that government should consider that we believe will boost the
confidence of the middle class and will positively reflect on demand are:
a. Rationalize
direct tax rates to leave more money in the hands of taxpayers of middle class
earning upto 25lacs p.a. Reduction in TDS rates mean nothing as the tax has to
be paid anyway.
b. Paying interest
for the moratorium period for the middle class. Government may consider only
home and education loans if not all the loans for this purpose. And as for eligibility
conditions, government may define a limit of income reported in the last ITR,
cibil score etc.
c. It should
suspend long term capital gains tax on equity at least for five years if not
removing it totally.
d. Provide
sales linked incentives to SMEs and micro enterprises to encourage them for
more sales at lower prices as is being done by countries like China &
others.
e. Introduce
social security schemes exclusively for the income tax payers. May start with
providing term insurance for a sum assured that is multiple of their gross or
net taxable income or tax paid as per last ITR filed.
f. Instruct its
executives at the lowest level not to harass small entrepreneurs in the name of
violation of rules but to sympathetically review the reason of violation and
also use warning before penalizing them.
g. And may
think of other measures that will bring confidence in the middle class that
they can sustain such periods in future as well despite lesser income for good
time.
Providing liquidity
and loans at cheaper rate is good and will reduce the cost of production for
the manufacturers, but if they don’t have buyers in the market then their cheap
good quality products will fetch nothing nor to the entrepreneurs neither to
government. But outstanding debt and unpaid interest will keep increasing which
will put both the parties in uncomfortable positions. So the government need to
think on the other side of the curve and find ways to increase demand and also
think of the middle class who is major vote share of the current regime.
Please do
share your views with us. You may also write to us for any query you may have.
You may whatsapp to # 9958447700 or write to ajay@investmentmitra.com
Thank you.
Happy
Investing!
Team InvestmentMitra
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