Budget expectations has been saved
Consumer and retail businesses are keenly awaiting this year’s budget with the expectation of seeing a boost to consumer spending. The recent increase in retail inflation has put pressure on consumer spending in the past few quarters with the Consumer Price Index (CPI) crossing the RBI’s 2-6 percent target band for the first time since 2016. The government is working hard to revive consumption over the past six months. It has already announced many initiatives to boost job creation and rural wage/income, and accelerate manufacturing and growth of industrial activities. Other initiatives the government can consider in the upcoming budget are mentioned below:
- Direct tax reduction: A decrease in personal income tax rates through rationalisation will help put more money in consumers’ hands and improve consumer sentiment, which is critical for spurring consumption. Given the subdued demand for many categories of consumer goods, the reduction in personal income tax rates could give a much needed impetus to the industry.
- Digital infrastructure: Another focus for the government could be to increase digitisation of non-urban centres in the country by rolling out 5G. The move will enable consumer goods companies to offer their services to the rural/rurban markets through e-commerce platforms (gaining easier access to these markets) and expand their customer base. This is expected to help more companies expand their distribution footprint across India. Rapid digitisation is likely to enable e-wallets/online payments to expand into the rural/rurban markets and easier payments/collections for consumer goods companies.
- Kirana stores (traditional mom-and-pop stores) are expected to greatly benefit from the digital push. To increase their reach, more large modern retailers and e-commerce companies are partnering with kirana stores and using these stores as drop-and-collection points. This in turn is expected to help kirana stores expand their reach and increase sales. The government can act as an enabler by using appropriate measures to contribute to the creation of digital infrastructure.
- Revival of manufacturing: The government can provide a fillip to the consumer goods and food processing industry, and boost local production and employment by incentivising the setting up of large manufacturing hubs in tier 2, 3, and rural towns. A pick-up in rural income, leading to an increase in food processing and manufacturing, can have a major impact on increasing rural wages. The ‘Food Parks’ initiative needs to be accelerated to provide companies/brands easy end-to-end access to food manufacturing facilities. The initiative will enable these companies to source food locally from farmers, thereby augmenting farmers’ income, and driving rural consumption and rural growth. It can help create employment by absorbing the local population in rural/tier 2 and 3 markets, along with reducing massive food wastage (we see in India) and transport costs. Employment will also help boost rural consumption as the real and disposal income in the hand of the rural consumers increase.
- Support to MSMEs: To boost entrepreneurship and accelerate growth of start-ups, the government can consider allowing the refund of GST input to start-ups. It could also look at lowering taxes on Employee Stock Ownership Plans (ESOPs), which is one of the key elements of remuneration by start-ups. This step is likely to help start-ups streamline their costs as the current tax incidence on ESOPs is relatively high.
- The government can further consider simplifying the taxation process, especially for small vendors and small e-commerce players. This step can help make the early-stage funding more convenient.
- Start-ups are among the firsts of businesses that have the advantage of building their organisations digital-first and operating with data-driven insights. Due to their ability to engage and acquire customers on digital channels, start-ups can achieve a significant scale through symbiotic relationships and an ecosystem of partners. They challenge status-quo using their innovative business models, and monetise their technology platforms through alliances and ecosystems. Start-ups can use India stack and take benefits of government policies to manage their costs and turn profitable faster.
- Established brick-and-mortar players have been experimenting with building their own e-commerce engagement channels and integrating legacy systems with digital platforms. Retaining their current customer base and rising their lifetime value could become difficult due to complicated buying journeys and new market entrants. Amplifying their core competencies and building a differentiator at their stores through in-store technologies, endless aisles, and seamless online-offline journeys can position them stronger among competition.
- Large enterprises have an uphill task to engage with different consumer segments at more human level through personalised engagement that is consistent across channels. Re-platforming legacy systems, introducing cloud-based solutions, and running a connected and responsive supply chain (capable to self-learn through blips and persistent trends of market) will become imperative for large enterprises to stay relevant and compete with others. With the increasing cost to acquire customers on digital channels, more enterprises will turn to partnering with start-ups or building capabilities in-house by adopting a culture of experimentation.
- Government policy and regulation: To provide a fillip to investments from foreign countries in the sector, the government could consider taking specific measures and improving ‘Ease of Doing Business’ in the country. India improved its ranking by 14 places to reach 63rd place (in a group of 190 countries) in the World Bank’s Doing Business 2020 report. It further targets to rank within the top 50 countries by next year. The government is also expected to work towards attracting FDI across sectors to boost industries and manufacturing, and get closer to achieving its goal of becoming US$5 trillion economy by 2024.
- Specific sectoral expectations to boost consumerism
- Agriculture: The government could look at direct benefit transfer (DBT) for agriculture input subsidy using Aadhaar linkages and digitisation to eliminate leakages. This would also help put money directly in the hands of the beneficiaries.
- Textiles: The Indian textile sector needs to be incentivised to become competitive vis-à-vis markets, including Vietnam and Bangladesh, to make it much more competitive. This would require interventions across the value chain ranging from labour costs, raw material sourcing, training, manufacturing, to finance and transportation. The government may also help by allowing textile manufacturers duty-free access to key markets through bi-lateral trade agreements.
- Gems and jewellery: These contribute nearly 7% to the Indian GDP. Further, it has about 15% share in the merchandise exports of India. The government can help grow the sector by building efficiencies across the value chain, incentivising manufacturing, and reducing import duty on gold from the current 12.5% to lower costs.
- Consumer durables and electronics: One of the key measures in the sector could be reduction of GST rates on electronic components and rationalisation of slabs for various product categories. GST rate cuts on components could provide manufacturers an incentive to expand production and reduce overall product prices, thereby further increasing demand and consumption. The government has already started looking at restricting “cheap” imports under the “others category” from various countries to boost local manufacturing. This should be speeded up to provide the necessary clarifications. These measures are expected to help reduce imports of finished goods into India. These would also be beneficial from the point of view of the government’s “Make in India” initiative (generating employment) as well as the Phased Manufacturing Programme (PMP).
- E-commerce: This sector has faced significant turbulence in the past in terms of policies and directives. This is one of the key sectors that help provide access of consumer products and services to the rural/rurban markAets, and create “inclusive” growth. The e-commerce sector thus requires a steady regulatory environment, which could boost the confidence in the sector and increase international investments. Exports from India is also a major focus of e-commerce companies. The government could focus on simplifying rules for B2C exports from India and supporting MSMEs on e-commerce platforms. The government may observe caution while opening the e-commerce inventory model for FDI.
- The government can be an enabler and catalyst for businesses and rewire them for the future by rolling out balanced initiatives across the board.
- Further extending India stack with UPI enhancement, video KYC, and identity services, and incentivising the stack adoption by businesses could be a great stimulus.
- A comprehensive e-commerce policy encompassing social media and data protection regulations are key pillars for the digital economy.
- Rationalising GST for the online-offline channels could help organisations build customer-centric businesses. Continuing to rollout welfare schemes and central projects (such as AMRUT and Bharatmala) will aid inclusive growth of tier 2 and 3 cities and help build smart rural communities (important for sustainability).
- While creating wealth is a task of private/public businesses, providing a conducive environment through a regulatory framework and stable policy structure falls under the government’s purview.
- Macro expectations from the Union Budget 2020 are around boosting consumption, creating jobs, and protecting MSMEs against MNC players. Enabling businesses to deliver on consumer expectations would be fundamental for the effectiveness of these businesses. After all, finding the right product at the right price and getting it conveniently delivered have only become more important in the digital age.
- Finally, corporates’ expect the government to give tangible and cash benefits as incentives to encourage them to use new technology and bring innovation in their regular operations to build efficiency.