An agenda for the Budget

Topics Budget 2020

Talented chess players and musicians often perform effortless feats of memory, which seem like magic.  A musician will hear a tune once, and reproduce it perfectly.  A chess player will recall thousands of games in their entirety.  These feats are contextual and driven by pattern perception.  Chess players recognise and remember the interactions of the pieces and pawns in patterns; they cannot recall a random setup of pieces as effectively.  Musicians recall tunes; they don't remember a random set of discordant notes as easily. 

Something similar occurs in investment.  Good investors don't necessarily recall specific numbers in balance sheets; they have a sense of how the numbers interact with each other in good businesses. They might or might not recall say specific details of the cash flow or stated profits in a given company, but they will recall if those numbers seemed consistent with each other. This, and other relationships, will tell them if the business is sustainably profitable and if the promoters are honest.  

Working through mac­roeconomic data for a similar take on the health of a nation is a similar exercise in pattern perception.  Any given number could look good or bad but the ways in which the numbers relate to each other must have overall consistency.  That consistency is lacking now in that a lot of numbers suggest the economy is doing badly while gross domestic product (GDP) growth supposedly continues at reasonably high rates. 

All the high speed data indicates that consumption has slowed considerably. If you take Goods and Services Tax (GST) collections as a proxy for non-government growth, the picture is very gloomy.  Between April – December, GST collections have been about 3.5 percent higher, year on year. That's nominal. The nominal growth expectation for GST collections in the Budget was close to 20 percent.

The inflation indices have run at between a low of 1 percent (wholesale) and a high of 4.5 percent (consumer Price) during April-October. The deflator is likely to be somewhere between those two figures. If we assume some degree of inflation, the GST collections suggest non-government activity grew very slightly, or not at all. The official estimate is non-government GDP is running at around 3.5 to 3.8 percent in real terms.  

About 60 percent of GDP comes from consumption and consumption accounts for an even larger chunk of non-government activity.  Tie the GST numbers to other known indicators of consumption, such as vehicle sales, biscuit sales, freight movements, power consumption, etc., and the assumption that consumption is down, gets stronger. One estimate is that consumption is growing at around 5-7 percent in 2019-20 versus a decade long trends where it has always grown at close to 20 percent.  (These are nominal numbers, not net of inflation). 

Any policy thrust that attempts to revive GDP growth rates has to aim to lift consumption growth.  The Budget should be aimed at that and so should non budgetary policy.  The government has already tried other measures such as corporate tax cuts and it has also expanded government expenditure to somewhat dangerous levels.  While corporate tax cuts boosted profits for some companies, it hasn't resulted in higher investment, and it won't, until consumption picks up.   

How can consumption be encouraged? One way would be to cut income tax rates. Another could be instructions to PSU banks to push their retail loans portfolio, perhaps by cutting personal loan rates.  A third method would be to encourage deep discounts in e-commerce – this would reverse policy decisions in that sector.  A fourth method could be to rationalise GST rates, pulling down items in the 28 percent list to the 18 percent level, and others. 

It would be surprising if the Budget didn't incorporate some policy such as the above and these would all impact consumption- dependent businesses positively. This would have to be backed up by talking up consumption, and by policy designed to create employment.  

The average consumer is seeing a trend of high unemployment and also a low growth in per capita income for the employed. So even persons with savings are wary of committing themselves.  Policy aim­ed at encouraging sectors that generate employment could be part of the Budget package. That's areas like real estate, construction and retail.  Assuming the Budget is rational, these are the areas to watch out for.

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