Turning consumption around: Jobs beat tax cuts to top economists’ budget wish list

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The government will have to look at avenues that create jobs while pushing up its own capital expenditure rather than giving cash transfers or tax benefits to salaried class, in order to spur consumption.

Economists and experts in the field say that schemes that create employment at the lower socio-economic levels should be the prime focus in the upcoming Union Budget since the marginal propensity to consume is highest at these levels, and therefore will be the key driver for revving up the demand engine.

“The usual strategy of increasing standard deduction won’t be helpful since additional incomes to households will go into savings,” said Abheek Barua, chief economist at HDFC Bank.

There could be room for cash transfers for small and medium scale enterprises (SME) in sector hit by the Covid-19 pandemic, to support wage payments which will create stable employment.

Aditi Nayar, principal economist at ICRA that an urban equivalent of MGNREGA could be the answer to creation of employment opportunities and boost consumption demand.

Enabling MSME and SME sector to continue to employ workers and for this, giving them the necessary fillip to help them hire more and sustainably should also be considered by the government, said Daksha Baxi, head of international taxation at law firm Cyril Amarchand Mangaldas.

“MSME and SME is the largest employment generating sector in the country. Despite the government giving stimulus packages to them, during lockdowns due to Covid they witnessed huge stress resulting in large scale layoffs,” she noted.

Small businesses should be helped further by keeping compliance to the minimum or keeping compliances for such segments unchanged for two years, she added.

The Centre will have to loosen its purse strings and push ahead with higher capital expenditure, especially with the projects that are already identified in the Rs 1-lakh crore National Infrastructure Pipeline, and where the plans are at an advanced stage.

“This will have a multiplier effect, and boost jobs and consumption,” ICRA’s Nayar said. Road and housing projects have a higher pass through as they are employment intensive and ensure the credit flow.

There will be limitations to increasing capex, said Madan Sabnavis, chief economist at Care Ratings, considering that the government will have to spend more on healthcare infrastructure and Covid relief programmes, therefore, letting go of high excise duty on petrol or cut in tax rates would be unlikely as Centre would be in dire need of incoming tax revenue and non-tax revenue.

“The government could look at DFIs for the infra sectors,” he added.

Government spending could be complimented by the private sector through a hybrid annuity route, HDFC’s Barua suggested. In such a model, the government makes payment in a fixed amount for a considerable period and then in a variable amount in the remaining period, and has been adopted in construction of highway projects.

“Paying up arrears of private construction companies either by settling long pending disputes could also have a trickle-down effect,” he added.

Some, however, believe that cut in personal income tax as a move to rebuild taxpayer confidence, which can in turn spur spending.

“For the economy to revive and spur consumption, the government should reconsider the changes to the basic salary under labour codes,” said Vishesh C Chandiok, CEO, Grant Thornton Bharat, backing cut in tax rates.

As per the new labour codes that will be effective from next financial year, the definition of wages – including salaries of executives in the private sector – caps allowances at 50% of total compensation, meaning that basic pay will have to be 50% or more of total pay. This means that special allowances and take home pay of employees could take a hit. At present, most wage structures have basic salaries ranging between 25% and 40% of the cost to a company.

On a separate note, the government could provide goods and service tax cash back or adjustment with direct tax liability for goods that are more than 50% Made in India, Chandiok added.

Increasing demand for locally made goods could also lead to increased consumption for the SME and MSME sectors that have been hit most by the Covid-19 pandemic.

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