No more loans, what the consumer is really looking for is a tax holiday

It's time the focus shifted from enhancing supply to improving demand

At a time when the economy is likely to see a severe contraction, we continue to apply band-aid. There was hope after Prime Minister Narendra Modi announced a Rs 20-trillion package, roughly translating into 10 per cent of the Gross Domestic Product.

Finance Minister Nirmala Sitharaman's Rs 21 trillion largesse doesn’t translate into more cash-in-hand for most. For example, the Rs 3-trillion central government guaranteed credit line for micro, small and medium enterprises (MSME) sounds great. After all, there will be a moratorium of one year. But the interest will accumulate for one year and will have to be paid later. Yes, MSMEs are facing severe problems due to cash crunch, but will they borrow more, produce goods and pay salaries in these uncertain times? Let’s see. Similarly, the two per cent reduction in Employee Provident Fund benefit for employers and employees will not give too much benefit to either. Anyway, it is only for three months.

The Indian economy was already suffering from a downturn before the Covid crisis hit us. Last September, the government gave hefty tax sops to India Inc. Result: Due to the reduction in tax liabilities, the price-to-earnings ratio improved. The markets cheered for a few days. But as days went by, there was a clear realisation that no fresh investments will happen because there was no demand.

At the same time, non-banking financial companies went into deeper stress as people stopped borrowing and there was a general fear about lending money to these firms. When the skeletons came out of the cupboards, the realisation dawned that many of these were riding tigers. For example, the monthly interest liability of a non-banking financial company was Rs 1,500 crore on a loan book of around Rs 1 lakh crore. This NBFC was clearly raising money at an unaffordable rate during a falling interest rate regime.

Then, Covid-19 happened. And the lockdown began. Now, after 50 days of the lockdown, a grand stimulus package has been announced. But it again focusses mostly on the supply side, and reforms that will give results in months or years later.

Meanwhile, demand has suffered badly. Most companies, barring an odd Asian Paints, have announced salary or job cuts… some of them severe ones. Even the central and state governments have cut salaries so one cannot blame the private sector only. So, in terms of income, an upper middle class family will most likely going to be downgraded to middle class, middle class to lower middle class and so on.

So car companies can make cars, builders may build houses, banks may lower interest rates, malls may open and there could be grand discounts at the best hotels, but few would be able to or interested in spending on such luxuries. The ones who do aren’t dependent on salaries but dividend incomes. Instead, there will be downtrading. A Pears soap user may go for Lux. And a Lux user may seek comfort in Lifebuoy.

Managing such times is an ‘out of syllabus exercise’ for any government. But this could be a good time for free lunches and tax holidays. A one-year tax income holiday for everyone or up to a certain salary level is likely to ensure that people don’t down trade or defer basic expenses. Yes, a car or home buying may not happen immediately, but even being able to maintain the existing lifestyle will help growth and India Inc.

Few would want a loan currently, but most need a free lunch. Since the nineties, successive governments have sold the ‘middle-class spending power’ dream to attract investments from global companies. It’s time to protect it.