India’s dilemma: fill the budget gap or help millions in need | Business and Economics News

New Delhi, India – As the pandemic hit India for the past two years, Prince Singh, a small producer of cotton tote bags in Ayodhya in the state of Uttar Pradesh, tapped into family savings, cut the salaries of its six employees and took out a personal loan on a new credit card – all to keep the business afloat.

Demand for shopping bags picked up after the second wave last summer and as lockdown restrictions eased, allowing Singh to gradually increase production to 300-400kg per day by December, although let that be well below its pre-pandemic daily average of 1,000kg. But now it’s “impossible” to sell more than 50kg a day, he says, as the Omicron variant spreads across the country.

Singh is no longer sure that his manufacturing business will survive all the chaos. “Customers are doing good business, forcing us to lower prices,” he says, even as rising prices for diesel and other raw materials “press” him.

The pandemic has hit small businesses in India, which have received little or no government stimulus, testing their resilience as they fear for their survival. These companies are also generally more labor intensive than larger companies and if they don’t survive – a real concern as they are broke by loss of pricing power and rising inflation – more families will sink with them.

Economists say that, in addition to Omicron’s impact, the speed and strength of India’s recovery hinges on the choices made by the architects of the country’s budget for the coming fiscal year – which spans from April to March.

Indian Finance Minister Nirmala Sitharaman will present the national budget on February 1, setting new targets for government spending, tax revenue, economic growth and budget deficits.

“I fear that if the next budget goes for fiscal consolidation, the recovery will not hold,” says Lekha S Chakraborty, a professor at the National Institute of Public Finance and Policy (NIPFP).

The country’s growing public debt and deficits pose a risk to macroeconomic stability and suggest a need for fiscal prudence, but such measures may come later.

In presenting last year’s budget, the government said it would aim to reduce its budget deficit to 4.5% of GDP by the fiscal year ending March 2026, choosing at the time to spending money on infrastructure to stimulate the economy.

“A hesitant recovery”

The government has some leeway for the next budget, as tax revenues exceeded its expectations. The question for economists and small entrepreneurs like Singh is whether he will use this money to reduce the budget deficit or to support the economy, and more specifically to help low-income households and businesses.

Given the uneven nature of India’s recovery, several economists, including from the government-owned State Bank of India, prefer the latter and want the next budget to increase support for parts of the economy ravaged by the pandemic. .

Prince Singh says it’s ‘impossible’ to sell more than 50kg of cotton shopping bags a day now, compared to 1,000kg before the pandemic [File: Company handout]

India’s uneven recovery can be seen in the advance estimates for 2021-2022 released by the National Statistics Office in early January. The estimates – technically projections as they are based on data for the first six months of the current fiscal year which ends in March – show that while the economy will recover by March, at least to its level of output d before COVID, Indians will continue to spend less money than before the pandemic.

India’s central bank is aware of this and in its latest monthly bulletin said the recovery was “gaining unevenly” and that while manufacturing was “showing a hesitant recovery”, services had yet to catch up to their levels. before the pandemic.

Even though data on the extent of Omicron’s damage to the economy is expected, the Reserve Bank of India anticipates low downside risk to the Indian economy, which it says “could prove to be more of a flash flood than a wave”. .

“Unequal access”

But while the biggest companies are reporting growth in profits, smaller entrepreneurs say consumers are reluctant to spend.

Hemant Nagpal has invested 20 million rupees ($266,212) to develop a software product to help businesses file invoices and taxes related to the National Goods and Services Tax. With an average of around 350 new businesses registering with the government’s Department of Corporate Affairs every day before the pandemic, he hoped he could easily attract at least 200 customers a month who would buy software from his company YourBooks to help them with their operations.

But the pandemic has hit its calculations as the government website sees less than 200 new companies signing up per month, and almost none are willing to spend the 300 rupees ($4) per month on the startup’s software. up.

“Small businesses aren’t willing to pay small amounts,” says Nagpal, who worked at Fidelity and Ericsson before launching YourBooks. “The product hasn’t taken off not because it’s not good but because COVID has made the market very conservative.”

NIPFP’s Chakraborty says India’s growth recovery is uneven due to the type of stimulus administered. “Our stimulus, largely the injection of central bank credit, has one big flaw, which is unequal access,” she says.

“Very small businesses do not borrow for fear that due to the uncertainty surrounding the demand situation, they will have no choice but to take out more expensive personal loans to pay off the bank loans they contract at this point.”

Bag maker Singh says even if he gets a loan, “how am I going to repay a loan when there’s so little demand”. His request for a loan on easier terms under a program announced by the government was rejected.

“Other countries have given small business grants, we haven’t received any support from the government,” Sunil Varghese, owner of Hevea Engineers, a small printer roll manufacturer in Chennai, told Al Jazeera. There is no cash flow and paying monthly costs over the past two years has eroded the company’s reserves.

“The survival of our 30-year-old small industry is in jeopardy as banks pile up pressure to repay the emergency COVID loan taken out at the start of the pandemic,” says Varghese.

Chakraborty says the government needs to broaden the base for recovery and that the next budget should focus on funding and addressing the humanitarian crisis instead of prioritizing fiscal correction or infrastructure spending.

“Capital spending is important for long-term growth recovery, but it is more important that the humanitarian crisis receives fiscal policy attention. Capex alone cannot take care of this,” she says. She thinks tax cuts, especially for low-income households and very small businesses, will be a faster way to boost demand.

A barber cuts a male client's hair at a salon in IndiaNaturals Salon & Spa struggles to pay salaries as customers stay away for fear of virus [File: Company handout]

“Tax relief will go a long way in bringing women back into salons, who are staying away for fear of the virus, and due to reduced family incomes and increased economic hardship,” agrees CK Kumaravel, Managing Director and co-founder of Naturals Salon & Spa which has more than 400 franchises in six states, all run by women, most of whom are first-generation entrepreneurs.

Business is slowly picking up after the chaos of the first two waves, when the company and its franchise network struggled to pay its 11,000 employees, even after pay cuts, as revenues fell 76% to 120 million rupees ($1.5 million). Many of its franchisees have exhausted their savings and had to borrow, including pawning their jewelry, to keep their small businesses alive.

“I am very disappointed that the government remains reckless,” Kumaravel said.

Comments are closed.