Exports to jobs: 5 macro signals FM should heed ahead of Budget 2024

Rural consumption slowdown and slowing bank deposits are among other issues she should consider

As Finance Minister Nirmala Sitharaman prepares to present a record seventh Budget on July 23, here are five macro data points that could help her.

Job crisis in the informal sector

The latest ‘Annual Survey on Unincorporated Sector Enterprises’ report showed that the number of workers employed in India’s vast informal sector in the 2022-23 is still below the pre-pandemic level in 2015-16 by 1.7 million at 109.6 million. It is the unincorporated enterprises in manufacturing that led the job loss, by 5.4 million during the seven-year period. While the situation has improved since the pandemic year of 2021-22, the numbers show the dire state of the unorganised sector requires urgent attention. President Droupadi Murmu’s announcement in her address to the joint sitting of Parliament that the scope of PM SVANidhi will be expanded and street vendors in rural and semi-urban areas will also be brought under its ambit is a welcome step. More efforts are needed in the Budget to rejuvenate the informal sector of the economy.

Rural consumption slowdown

On the demand side, private spending, represented by private final consumption expenditure, slowed down to 4 per cent in FY24 from 6.8 per cent in FY23. This is at a time when the gross domestic product (GDP) grew at 8.2 per cent in FY24. An analysis of 12 proxy indicators by Motilal Oswal Financial Services suggests that rural consumption spending declined for the third successive quarter in the fourth quarter of FY24, marking the worst in 33 quarters. “Rural spending contracted 3.1 per cent Y-o-Y (year-on-year) in 4Q FY24 following a drop of 2 per cent Y-o-Y in 3Q FY24 and a growth of 2.6 per cent Y-o-Y in 4Q FY23. This was mainly due to a second consecutive contraction in fiscal real rural spending, continuous deterioration in reservoir levels, farm exports, and tractor sales, and the worst contraction in fertiliser sales since 1Q FY14 along with muted rural wage growth,” it said.

While the projected normal monsoon this year augurs well for rural demand, the government cannot rely only on the rain god’s mercy. Higher allocation for welfare schemes for rural India in the Budget, without compromising fiscal discipline, should be a top priority for reviving rural demand.

Dipping FDI

Government data shows that foreign direct investment (FDI) equity inflows contracted 3.5 per cent in FY24, thus falling to a five-year low in FY24 to $44.42 billion due to factors such as high interest rates in advanced economies as well as limited absorptive capacity in various domestic sectors. While India can draw comfort from the global decline in FDI inflows as well in 2023, it should undertake further liberalisation in sectors like insurance, e-commerce and multi-brand retail to attract more foreign investment. A signal in the Budget to redraft the Bilateral Investment Treaty document that is acceptable to more partner countries can give confidence to investors to bring more FDI into the country.  

Exports in trouble

India’s merchandise exports contracted 3 per cent in FY24 to $437.1 billion. The decline was led by labour-intensive sectors like leather (-10.2 per cent), gems and jewellery (-13.8 per cent), textiles (-2.6 per cent), sports goods (-1 per cent). Extension of the interest equalisation scheme for micro, small and medium enterprises beyond the August 31 deadline and a dedicated fund for such businesses to boost their export capacity as well as for promotion and marketing of their products can be helpful.

Dipping savings deposit growth

The gap between credit and deposit growth of commercial banks is widening (credit-deposit ratio was at 76.8 per cent at end March 2024), mostly because of slow growth in current and savings account (CASA) deposits. Most of the deposit growth for banks is now coming from the term deposits that are growing at 18.2 per cent compared to CASA growth of 6.9 per cent at end March 2024. Public sector banks are even worse off with only 5.2 per cent CASA deposit growth.

Dinesh Khara, the outgoing chairman of State Bank of India, has advocated tax relief on the interest income earned by account holders. Under current regulations, banks have to deduct 10 per cent tax when interest income earned from deposits across all the bank branches exceeds Rs 40,000 annually. For savings accounts, interest earnings up to Rs 10,000 annually are exempt from tax. Tax relief on higher interest income in the Budget could increase deposit growth of banks and bring relief to the middle class.