Focus on resolving demand-side issues in budget: Ind-Ra

27 Jan '21

3 min read

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The next budget must redirect the Indian government’s focus in resolving demand-side issues by moving away from fixing supply side problem which has been the focus since March last year, when the pandemic began to pummel the economy, according to a report by India Ratings and Research (Ind-Ra), which expects the budget to focus on boosting aggregate demand, expenditure reprioritisation and mobilising higher non-tax revenue.

"It is high time to change gears and focus on the demand side as well, lest the ongoing recovery begins to lose steam. There is nothing wrong in addressing the supply-side issues, as it was necessary to restore/augment the broken supply chains. But, lack of adequate demand may jeopardise the recovery and may even lead to a second-round impact," Ind-Ra’s Sunil Kumar Sinha cautioned in a note.

The pandemic-induced lockdowns resulted in the economy tanking 23.9 per cent in the June quarter but made a dramatic recovery with the contraction improving to just 7.5 per cent in the second quarter and is likely to re-enter the green zone in the second half which may help the economy close FY21 with a contraction of 7.5-8 per cent.

Sinha cautioned that even if the supply-side bottlenecks get restored on account of various government or Reserve bank of India measures, it may soon run into difficulties due to the lack of adequate demand for goods and services.

"The economy has shown some green shoots with several high frequency indicators reaching the pre-pandemic level of production, bolstered by a combination of festive/pent-up demand. But, after two consecutive months of positive growth, the factory output contracted in November, showing the fragility of the recovery. Therefore an appropriate demand-side measure therefore is as important as supply-side measures," he said.

Sinha said the priorities should include raising infrastructure spending, especially that are employment intensive and have a shorter turnaround time; setting up a development financial institution on the lines of the erstwhile ICICI, IDBI and IFCI that can have patient capital or bring in the same; continuing with the ongoing relief/income support to the poor households; and allocating more funds to The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) as it provides a safety net not only to rural households but also to the workers who migrated back to rural areas.

The government should extend more support to real estate, especially affordable housing segment; and to micro, small and medium enterprises as these still face headwinds in securing finance, he said.

Another key area is to reprioritise both revenue and capital expenditure towards essentials, giving priority to mass vaccination/public health. The budget must rationalise/discontinue schemes/sub-schemes that have meagre resource allocation., he said.

The budget must also take measures to mobilise higher non-tax revenue to fund expenditure and finally states must be given adequate money and assured of Central support when needed as most of the spending happens at the states, he added.

Fibre2Fashion News Desk (DS)

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