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By Sriram Iyer Feb 2, 2023 12:50:49 PM IST (Updated)
Union Budget 2023: PM Modi administration hopes that the three Cs - capex, consumption and credit - will propel India to be a richer country as well as a destination for both foreign investors and tourists. On all three counts, the government has stayed on its trajectory that it has held for the last few years, with the belief that its measures will eventually kickstart an exemplary growth phase that hasn’t been seen in the country in the last 20 years.
Nirmala Sitharaman's fifth Budget as India's Finance Minister was another attempt to boost capital investments, household consumption and credit to big and small businesses. The three Cs, the Modi administration hopes, will propel India to be a richer country as well as a destination for both foreign investors and tourists.
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Will budget 2023 manage to boost consumption?
The measures taken to boost consumption include income tax cuts, a higher allocation for affordable housing, some duty cuts on items like camera lenses for mobile phones, television panels, and lithium-ion batteries, to name a few, and the emphasis on growing tourism over a longer period of time.
Here's the context in which these steps were announced. More than six in every ten households expect their incomes to shrink by a fourth in the next year, according to a recent survey. A report from broking firm Motilal Oswal estimated that India's household savings had hit a 30-year low at the end of September 2022.
| Period | Total household savings (as a % of GDP) |
| FY19 | 20.2 |
| FY20 | 19.7 |
| FY21 | 22.6 |
| FY22E | 19.1 |
| April-September 2022 | 15.7 |
Source: Motilal Oswal
Now, given the situation, it may be tough to say if these steps may be enough to boost consumption in the millions of Indian middle-class households, where budgets have been squeezed by a sustained wave of price rise and the fear of job loss for those who haven't lost it already.
Most of those in rural India, who do not have formal jobs, had seen their wages shrink for over a year before inflation took a bigger bite out of what was left in their pocket.
The Indian government has received accolades for providing food, grain and pulses free of cost, a scheme that was started at the peak of the pandemic. It will continue to be in effect till the end of December 2023.
While this will ease the pressure on the country's poor, there's no clear sign that it has led them to spend on other necessities of life any more than they already do. India's biggest consumer staple makers have struggled with consumer demand for a few quarters now.
The income tax cuts seem to be aimed at pushing taxpayers into a new tax regime with lower rates and no exemptions, which hasn't proved attractive to most people so far. It isn't beyond doubt that these new tax slabs will leave people with more money and the inspiration to spend.
Will Budget 2023 spur capital investments?
The Indian government has already stretched itself in recent years pumping precious money into sectors like railways, roads and highways, and other critical infrastructure. The emphasis continued in this budget too. The Modi administration believes that these investments will trigger a virtuous cycle of investments from private companies, which will then, in turn, create new jobs.
However, the second half of the argument i.e. the wait for private investments, remains in the realm of hope. While many big companies and market experts have been generous with their adulation for the budget's impetus for capex, comments aren’t the proof of the pudding, as the data shows so far.
Capital needs credit as much as opportunity
Of the three Cs, this is possibly the healthiest part of the Indian economy at this stage. The credit growth in India between April and November 2022 has been the highest in the last seven years, according to the latest Economic Survey.
However, just as in many other parts of the world, interest rates are on the rise in India too. This has made capital increasingly expensive, and the swing up is far from over.
While it helps that the banks have cleaned up their balance sheet, and the huge pile of toxic unpaid loans are now out of the system, lending needs confidence in both the borrower and the lender. Confidence is in short supply given the spate of shocks beyond anyone's control: from a pandemic to a war, leading to crunched supplies, unmet demands, and soaring prices.
Even though Indian corporates have shed much of their loan baggage in recent years, the willingness to borrow to invest in productive capacities is still far less than ideal. And, on that count, it's a chicken and egg situation. Capital is waiting for growth, which is waiting for capital.
The government has extended an emergency credit line that was opened for the country's small businesses during the pandemic, and it should be helpful for the businesses as well as the economy.
However, given the sluggishness in global trade, the softness in exports, and the crude surge in input costs, one may need more than the usual risk appetite to make fresh investments.
On all three counts, i.e. capex, consumption and credit, the government has stayed on the trajectory that it has held for the last few years, with the belief that its measures will eventually kickstart an exemplary growth phase that hasn't been seen in the country in the last 20 years. The citizens of India would love to see the vision materialise, sooner than later.
First Published: Feb 1, 2023 8:28 PM IST
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