India’s dilemma: close fiscal deficit or help millions struggling Business and Economic News

New Delhi, India – As the pandemic hit all of India in the last two years, Prince Singh, a small cotton bag manufacturer in Ayodhya in Uttar Pradesh, plunged into family savings, cut the salaries of his six workers and took out a personal loan for a new credit card – all for business maintenance.

Demand for shopping bags revived after the second wave weakened last summer and with the easing of blocking restrictions, which allowed Sing to gradually increase production to 300-400kg per day by December, although well below his average daily allowance. before the 1000 kg pandemic. But it is now “impossible” to sell more than 50kg a day, he said, as the Omicron variant is spreading across the country.

Singh is no longer sure if his manufacturing business will survive the chaos. “Customers are making lucrative deals, forcing us to lower prices,” he said, although rising prices for diesel and other raw materials are “pressing” him.

The pandemic has affected small businesses in India, which have received little or no government incentives to test their resilience as they fear survival. These businesses are also usually more labor-intensive than larger companies, and if they fail to survive – a real concern as they are shattered by the loss of pricing and rising inflation – more families will sink with them.

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

Indian Finance Minister Nirmala Sitaraman will present the national budget on February 1st, envisioning new targets for government spending, tax revenues, economic growth and fiscal deficits.

“I fear that if the forthcoming budget goes to fiscal consolidation, the recovery will not continue,” said Lecha C. Chakraborty, a professor at the National Institute of Public Finance and Policy (NIPFP).

Rising government debt and the country’s deficits pose a risk to macroeconomic stability and appear to indicate a need for fiscal prudence, but such measures may come later.

In drafting last year’s budget, the government said it would seek to reduce its fiscal deficit to 4.5 percent of GDP by the financial year ending March 2026, at which time it chose to spend money on infrastructure to stimulate the economy.

Suspended Recovery

The government has little room for manipulation of the upcoming budget, as tax revenues have exceeded expectations. The question that economists and small business people like Singh have is whether they will use this money to reduce the fiscal deficit or to support the economy, and in particular to support low-income households and businesses.

Given the uneven nature of India’s recovery, several economists, including the State Bank of India, prefer the latter and want the forthcoming budget to increase support for the pandemic-devastated parts of the economy.

Two men are working on a machine that makes canvas bags in IndiaPrince Singh says it is now “impossible” to sell more than 50kg of cotton shopping bags a day, up from 1,000kg before the pandemic [File: Company handout]

India’s uneven recovery can be seen from preliminary estimates for 2021-2022 published by the National Statistics Office in early January. Estimates – technical forecasts, as based on data from the first six months of the current fiscal year ending in March – show that while the economy recovers by March, at least to its pre-COVID level, Indians will continue to spend less money than before the pandemic.

The Central Bank of India is aware of this and said in its latest monthly bulletin that the recovery was “gaining momentum unevenly” and that while production “shows a halt to recovery”, services will still catch up before the pandemic.

Even when data is expected on how much Omicron has damaged the economy, the Reserve Bank of India predicts a small risk of a downturn for the Indian economy, which it says could be “a flood rather than a wave”.

“Uneven access”

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

Hemant Nagpal is investing 20 million rupees ($ 266,212) to develop a software product to help businesses file invoices and taxes related to the national tax on goods and services. With an average of more than 350 new companies registering daily with the government’s corporate affairs ministry before the pandemic, he hoped to easily catch at least 200 customers a month buying software from his company, YourBooks, to help them operations.

But the pandemic has hit its math, as less than 200 new businesses a month are registered on the government’s website, and hardly anyone is willing to spend 300 rupees ($ 4) a month on startup software.

“Small businesses aren’t willing to pay small amounts,” said Nagpal, who worked at Fidelity and Ericsson before launching YourBooks. “The product did not come out not because it was not good, but because COVID made the market extremely conservative.”

Chakraborty from the NIPFP says that the recovery in growth in India is uneven due to the type of stimulus applied. “Our incentive, largely the inflow of central bank loans, has a big loophole that is uneven access,” she said.

“Indeed, small companies do not take out loans for fear that due to uncertainty about the demand situation, they may have no choice but to take more expensive personal loans to repay all the bank loans they are taking at the moment.

Bag maker Singh says that even if he gets a loan, “how will I repay a loan when there is so little demand”. His application for a more lenient loan under a scheme announced by the government was rejected.

“Other countries have given grants to small businesses, we have not had the support of the government,” Sunil Vargese, owner of Hevea Engineers, a small print roll maker in Chennai, told Al Jazeera. There is no cash flow and the payment of monthly expenses in the last two years has eroded the company’s reserves.

“The survival of our 30-year-old small industrial unit is under threat because banks are pushing to repay the emergency loan for COVID taken at the start of the pandemic,” Vargese said.

Chakraborty says the government needs to make recovery more broad-based, and says the upcoming budget should focus on financing and resolving the humanitarian crisis, rather than prioritizing fiscal adjustment or infrared spending.

“Capital expenditures are important for the long-term recovery of growth, but it is more important that the humanitarian crisis pays attention to fiscal policy. “Capex can’t take care of that alone,” she said. She believes tax cuts, especially for low-income households and very small businesses, will be a faster way to boost demand.

A barber cutting the hair of a man's client in a salon in IndiaNaturals Salon & Spa is struggling to pay salaries as customers stay away from fear of the virus [File: Company handout]

“Tax breaks will go a long way in attracting women back to salons that stay away from fear of the virus and reduced family incomes and increased economic hardship,” agreed CK Kumaravel, CEO 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.

The business is booming slowly after the chaos of the first two waves, when the company and its franchise network struggled to pay their 11,000 employees, even after pay cuts as revenue fell 76 percent to 120 million rupees (1.5 million). dollars). Many of his franchisees ran out of savings and had to borrow, including by betting on their jewelry to keep their small businesses alive.

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

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