Union budget unlikely to impact consumer spending

Low government spending and low consumer expectations to keep growth subdued

by Mahesh Vyas

Does the budget in any way help increase consumer spending? It could do this by somehow delivering higher monies into the hands of households. It could do this most effectively by providing jobs to unemployed or by providing subsidies to targeted families. An increase in government spending generally increases consumer demand. Consumer demand can also be increased by reducing taxes.

Introducing Universal Basic Income would be a bold way of spurring consumer demand during times of distress, such as now. Although the pre-budget buzz seemed to suggest that we would get there, eventually we did not. The budget, however, has decided to keep the allocation for the employment guarantee scheme MGNREGA at an elevated level.

MGNREGA allocations increased by a record 12 per cent in 2015-16 and then the increase more than doubled to 27.2 per cent in 2016-17. This reflects the stress in rural India on jobs. Revised estimates for MGNREGA are 23.4 per cent higher than budgeted estimates. Now, the budgeted expenditure in 2017-18 is 1.1 per cent higher than the revised estimates. So, although the expenditure remains elevated, there is no growth compared to the previous year. Therefore, this is unlikely to spur greater consumer spending.

Food subsidy is budgeted to grow by 7.5 per cent after a fall of 3 per cent in 2016-17. The fall in 2016-17 is most likely an arrear which will have to be settled in 2017-18 and this may lead to arrears in 2017-18. The effective increase in food subsidy is therefore small compared to the 28 per cent increase in 2014-15 and 18.5 per cent increase in 2015-16.

Direct benefit transfers for LPG subsidy is projected to grow by a negligible 0.7 per cent.

Overall central government expenditure is budgeted to grow by 6.6 per cent. This is low compared to the 12.5 per cent growth in 2016-17 and the 9 per cent per annum average growth during the preceding six years. During 2008-09, when the economy was hit by the global financial crisis, government expenditure was raised to grow by 22.2 per cent followed by another 24 per cent in 2009-10. This helped the economy absorb the shock. However, the below-average growth in government expenditure in the face of the demonetisation could work against reviving the economy from its current lacklustre performance.

Household disposable income, however, will rise marginally following the budget proposals.

The union budget has reduced the tax liability of households. Every individual who pays income taxes stands to gain, with the maximum benefit being Rs.12,500 per annum. For those whose income is between Rs.5 million and Rs.10 million a 10 per cent surcharge has been levied. This surcharge, in fact, increases their net tax burden as it more than offsets the gain of Rs.12,500. On a net basis, the government has given a dole of Rs.128 billion to the middle and higher income groups. For comparison, the MGNREGA dole is Rs.480 billion.

We expect this bonanza of Rs.128 billion to households will be mostly saved by them rather than spent on consumption. This is because consumer expectations are weak. Households use discretion in spending. This discretion is an outcome of expectations. If expectations are low, households defer expenses even when there is an increase in income.

The BSE-CMIE-UMich consumer expectation index is running low. As of the week ending January 22, it was 96.83 (base: 100 during October-December 2015). Demonetisation raised expectations sharply. But, these dissipated quickly. Consumers today are less enthusiastic regarding their future than they were about a year ago. As a result, the Rs.128 billion bonus from the government to households will most likely not help in boosting consumer demand.

We had projected private final consumption expenditure to grow by 3.5 per cent and 4.5 per cent in the October-December and January-March quarters and then by 6.2 per cent in 2017-18. The union budget proposals do not warrant any changes in these.

CMIE STATISTICS
Unemployment Rate
Per cent
3.6 -0.1
Consumer Sentiments Index
Base September-December 2015
95.8 -0.2
Consumer Expectations Index
Base September-December 2015
96.8 0.0
Current Economic Conditions Index
Base September-December 2015
94.1 -0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 16 Dec 16 Mar 17 Jun 17
New projects 2.37 1.46 2.92 1.64
Completed projects 2.23 0.94 1.81 1.10
Stalled projects 0.65 1.01 0.35 2.45
Revived projects 0.91 0.17 0.62 0.29
Implementation stalled projects 0.37 0.81 0.33 0.64
Updated on: 17 Aug 2017 8:20PM
Quarterly Financials of Listed Companies
(% change) Sep 16 Dec 16 Mar 17 Jun 17
All listed Companies
 Income 2.1 6.2 10.3 10.2
 Expenses 1.9 6.4 11.9 10.2
 Net profit 14.6 40.3 17.9 -16.1
 PAT margin (%) 6.9 6.1 6.1 6.0
 Count of Cos. 4,495 4,496 4,398 2,707
Non-financial Companies
 Income 0.6 6.0 11.8 10.8
 Expenses -0.2 7.3 15.5 10.7
 Net profit 26.6 24.6 -1.1 -20.6
 PAT margin (%) 6.9 6.2 6.3 6.1
 Net fixed assets -9.2 7.6
 Current assets 8.1 2.2
 Current liabilities 11.6 8.6
 Borrowings 3.1 4.9
 Reserves & surplus 8.4 6.5
 Count of Cos. 3,481 3,486 3,419 1,975
Numbers are net of P&E
Updated on: 17 Aug 2017 8:30PM
Annual Financials of All Companies
(% change) FY13 FY14 FY15 FY16
All Companies
 Income 12.6 10.0 4.9 1.0
 Expenses 12.8 9.8 5.0 1.2
 Net profit 0.9 -2.3 1.3 -15.2
 PAT margin (%) 3.5 3.2 3.2 3.0
 Assets 14.3 12.3 9.3 8.8
 Net worth 9.6 9.6 8.8 7.6
 RONW (%) 6.8 6.2 6.1 5.3
 Count of Cos. 25,384 22,944 22,236 18,452
Non-financial Companies
 Income 11.9 9.7 4.1 0.0
 Expenses 12.2 9.3 4.2 -0.6
 Net profit -8.6 -2.6 -6.1 6.3
 PAT margin (%) 2.4 2.2 2.2 2.7
 Net fixed assets 12.9 11.6 13.0 13.9
 Net worth 7.8 8.6 7.4 6.9
 RONW (%) 5.5 5.1 4.9 5.6
 Debt / Equity (times) 1.1 1.1 1.1 1.0
 Interest cover (times) 2.1 2.0 1.9 2.0
 Net working capital cycle (days) 72 69 67 67
 Count of Cos. 19,804 18,286 17,814 15,125
Numbers are net of P&E
Updated on: 04 Aug 2017 3:37PM

Time-series available since 1992-93