While most individuals would welcome tax rate cuts with open arms, boosting consumer spending requires more long-term measures
Capital allocation to areas such as manufacturing and infrastructure development that will propel consumer spending indirectly
Analysts also believe that rural demand is slowly rebounding after remaining subdued throughout FY24, but this needs a big push now
Finance Minister Nirmala Sitharaman should be more than familiar with all the pre-budget expectations for the startup ecosystem by now. The Union Budget presented in 2023 and the interim Budget of February 2024 were not exactly geared towards Indian startups. In terms of the primary expectations from the Union Budget 2024, there’s not much that has changed for Indian startups.
Having said that, there’s a feeling that this will be Union Budget focussing on the Indian startup story, at least for one major reason — the expected boost for consumer spending through infrastructure and job-creation schemes, and perhaps, even some rationalisation in the income tax slabs or rates as per the new regime.
As per media reports, speculation is that Sitharaman and the Finance Ministry have seriously considered friendlier tax measures such as cutting the rates of income tax or adding a new slab to push consumption, with a specific focus on the lower-income strata.
Reuters claimed that FinMin officials discussed making changes to the new tax regime which was introduced in 2020. Individuals reporting annual salaries of over 15 Lakh are likely to see some relief according to the agency. Besides this, the FM could announce lower personal tax rates for annual income of INR 10 Lakh as well.
The hope is that loss of government revenue through tax cuts could be partially offset by increased consumption. However, there are several economists who believe that tax rate cuts or adjustments would only be a short-term measure for boosting consumer spending.
While consumers and salaried workers would welcome tax rate cuts with open arms, boosting consumer spending and growth for Indian startups would need more long-term measures and capital allocation to areas that will propel consumption indirectly.
For instance, an economist at a national Indian bank told us that the lower taxes may not necessarily spur consumption. “The drop in consumption demand in India is largely led by the rural sector. This has corrected to some extent, but providing tax incentives which will majorly accrue to the urban organised sector workers, is unlikely to have the desired outcome on rural consumption. We need to look beyond taxes as a way to drive spending,” she added.
Looking Beyond Tax Rates
Analysts also believe that rural demand is slowly rebounding after remaining subdued throughout FY24, due to persistent inflation, slow growth in wages and other spending constraints.
Nielsen IQ reported in May 2024, India’s FMCG and consumer brands sector witnessed rural consumption growth in volume terms in the January to March quarter, and outpaced urban consumption for the first time in five quarters.
Rural consumption grew at 7.6% year on year (YoY) in the quarter, while urban consumption stood at 5.7%. In contrast, YoY rural volume growth was at 5.8% in the previous quarter, while urban consumption was at 6.9%.
Interestingly, the rural-urban consumption equation has flipped on the back of growth for non-food consumption, with a growth rate of 12.8% in the January-March quarter, led by beauty, personal care & home care categories. It is vital to continue fuelling this trend with non-tax measures as well as tax rebates.
So Indian startups with B2C models are also advocating for more spending in rural areas, particularly in infrastructure, manufacturing and agriculture, which will fuel job creation and revitalise the economy outside the large cities and metros.
Instead of tax sops and rebates, infrastructure-related measures such as improving last-mile connectivity in the logistics sector would be more beneficial for D2C brands and Indian startups. “The 2024 budget needs to focus on infra and manufacturing as this would improve demand fulfilment and reduce cost of doing business for brands in the long run. These savings can be passed on to consumers eventually,” the economist quoted above added.
These measures are critical as net household savings in India have declined from 22.7% of GDP in FY21 to 18.4% in FY23, as per the National Account Statistics 2024 data, released by the Ministry of Statistics and Programme Implementation (MoSPI).
Manufacturing Is Key For India’s Future
For many of the stakeholders in the consumer tech and products space, the government’s larger push on the manufacturing front is encouraging, since it creates jobs and drives consumption organically. But more needs to be done in this regard.
In the past we have seen companies keep capital expenditure for new machinery and plants low when they are uncertain of demand. While the government has looked to increase capacity by incentivising exports and through production-linked incentives, these are still early days for these schemes.
Driving corporate investment in manufacturing calls for better visibility of consumer demand, which is where short-term tax rebates might provide a helpful hint. Tax cuts need to be applied along with long-term measures as this will allow for consistent growth.
“Job creation translates into more money in the hands of consumers and helps to kick-start the economy in places that need most help. Additionally, investments in agriculture bolster the rural economy and stimulate consumption across stratas,” said the founder of a Delhi NCR-based healthy food brand.
Many expect that the government will indeed look to spend more on infrastructure and manufacturing because of the record $25 Bn (INR 21 Lakh Cr) surplus transfer from the Reserve Bank of India to the central government. This gives the finance ministry more room to spend without expanding the fiscal deficit. Besides this, the higher tax revenue in the previous fiscal can also contribute to higher government spending on infrastructure, agriculture and job creation.
Any boost to the disposable income of individuals is a boon for sales and revenue generation. This includes a raft of the largest and most scaled up startups in India — ecommerce marketplaces Meesho, Amazon and Flipkart, delivery giants such as Zomato, Swiggy, Zepto and others, as well as the many new mobility platforms and thousands of D2C brands.
A Budget For Startups: Breaking The Pattern
Many economists expect that the government will not provide too much relief in income tax, because direct tax collection is an important priority for the government. Tax collections are critical for infrastructure schemes, and the government needs to have a strong and stable tax base to implement these schemes.
Over the past two terms, the Narendra Modi government’s biggest focus has been to reduce tax leakages, which has resulted in many tax-related litigation involving startups — reflected in the state of gaming startups — and large enterprises such as Airtel and Vodafone. The government is unlikely to break this pattern now and look at a short-term measure.
Indeed, it would be hard for the Sitharaman and the Finance Ministry to veer too far off from this because of fiscal deficit reduction targets. Instead, consumer spending boost is likely to come from a focus on capital expenditure, which is expected to benefit India’s middle-class in the long term. A tax rate cut, many experts reckon, will be anything but long-term and could only bring a short-term boost to consumer spending.
The RBI dividend boost and the positives from higher tax collections in the previous fiscals certainly solidifies the idea that the government will look to spend more in the hope of driving consumption for the long run.
