Aashish P Somaiyaa
For our own good, I am hoping the budget is tough on us as consumers. Let me remind you of that popular adagespare the stick and spoil the child or one of those Bollywood dialoguesbachpan mein sahi waqt par ek thappad lagaya hota, toh aaj yeh din na dekhna parta. Some thappads have indeed come through in the form of fuel price hikes and the high interest rate regime maintained by the RBI; finally the impact is being felt too in auto sales numbers.
Thanks to the global financial crisis of 2008-09 and the loose fiscal policies followed since, the spending power has moved away from the government and in favour of consumers, leading to the government running up deficit. A prolonged consumption boom should eventually result in spurring corporate growth and economic expansion.
When the government has the spending power, it spends on building roads, ports, bridges and airports raising demand for investments in capital goods, factories, cement and the like resulting in turn in corporate growth too; when the janta has the spending power, one expects them to consume more, resulting in inflationary trends, and thats what we did. Inflationary trends are best curtailed by making it difficult to consumeso raise taxes and make it difficult borrow. So there you go, higher interest rates means less spending and more saving, higher excise and customs duties, a wider tax net, increased coverage of services tax and the like.
The good news is that we are all part of this one cyclical counter-balance and one must behave counter-cyclically. When consumption comes down, that also reduces the subsidy burden for the government. When taxes are raised, that improves the fiscal situation of the government and curtails the need for it to borrow and eventually create room for RBI to reduce interest rates. The spending power moving to the government would eventually mean more investments in infrastructure and social sectors like health care and education.
So I pray the budget announces an end to the consumption cycle instead of prolonging the fag end of whatever is left now; and it creates the necessary conditions to spur the next big investment growth cycle. Let the government take away some more spending power from the consumer and create spending power for itself and corporate and institutions to be able to invest in capital projects, infrastructure and social sectors. Only if this happens will begin the next consumption cycle; a bigger and better one.
Consumers do not have to worry about deferred purchase of a car or a house or the inability to shop much. Incidentally, when you find it increasingly difficult to consume, is the best time to invest. Thats why 2005-2008 was the best time to make money in stocks, and 2009-2011 was the best time to consume when markets didnt do much.
I expect the budget to continue to make it difficult to consume; simultaneously improve the governments fisc by reducing subsidies and raising taxes and go big on encouraging employment generation and investment in infrastructure and social sectors like health and education. If this plays out; one can expect the market to show us the next big boom. But for that, one needs to be invested in stocks firsteither directly or through mutual funds.
The writer is CEO,Motilal Oswal AMC