India’s dilemma: close the budget deficit or help millions of people | Business and Business News

New Delhi, India – As the pandemic swept across India over the past two years, Prince Singh, a small manufacturer of cotton carrier bags in Ayodhya, Uttar Pradesh state, drew on his family’s savings, cut the salaries of his six workers and took out a personal credit card loan – all to keep the business going.

Demand for shopping bags revived after the second wave ebbed away last summer and as lockdown restrictions eased, allowing Singh to gradually increase production to 300-400kg per day by December, although this was well below his daily average of 1,000kg was before the pandemic. 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 his production facility will survive the chaos. “Customers are bargaining and forcing us to cut prices,” he says, even as rising prices for diesel and other commodities are “putting him under pressure.”

The pandemic has hit India’s small businesses, which have received little to no government stimulus, testing their resilience as they fear for their survival. These companies also tend to be more labor-intensive than larger companies, and if they don’t survive — a real problem as they’re being lashed by the loss of pricing power and rising inflation — more families will perish with them.

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

India’s Finance Minister Nirmala Sitharaman will present the national budget on February 1st, which includes new targets for government spending, tax revenues, economic growth and budget deficits.

“My concern is that if the upcoming budget is set for fiscal consolidation, the recovery will not be sustainable,” said Lekha S. Chakraborty, a professor at the National Institute of Public Finance and Policy (NIPFP).

The country’s rising public debt and deficits pose a risk to macroeconomic stability and seem to point to the need for fiscal caution, but such action may come later.

When preparing last year’s budget, the government said it would reduce its budget deficit to 4.5 percent of GDP by the fiscal year-end in March 2026, opting instead to spend money on infrastructure to boost the economy.

“A faltering upswing”

The government has some leeway for the upcoming budget as tax revenues have exceeded expectations. The question for economists and small business owners like Singh is whether they will use this money to reduce the budget deficit or to support the economy, particularly helping low-income households and businesses.

Given India’s uneven recovery, several economists, including the state-owned State Bank of India, favor the latter and want the upcoming budget to boost support for the pandemic-hit parts of the economy.

Prince Singh says it is “impossible” to sell more than 50kg of cotton grocery bags a day now, compared to 1,000kg before the pandemic [File: Company handout]

India’s patchy recovery can be seen in the 2021-2022 forecasts released by the National Bureau of Statistics in early January. The estimates — technically projections as they are based on data from 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 pre-COVID production levels, Indians will carry on spend less money than before the pandemic.

Aware of this, India’s central bank said in its latest monthly bulletin that the recovery was “gaining uneven traction” and that while manufacturing “showed a faltering recovery”, services have yet to catch up to pre-pandemic levels.

While awaiting data on how badly Omicron has hurt the economy, the Reserve Bank of India expects there is little downside risk to the Indian economy that “could prove to be more of a flash flood than a wave.” .

“Uneven Access”

But while the largest companies report earnings growth, small business owners say consumers are reluctant to spend.

Hemant Nagpal invested Rs. 20 million ($266,212) in developing a software product to help businesses file invoices and taxes related to the National Goods and Services Tax. With an average of about 350 new businesses registering with the government’s Department of Business 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 use in their business to help operations.

But the pandemic hit his math, with fewer than 200 new companies registering on the government website each month, and few willing to spend the 300 rupees ($4) a month on the startup’s software.

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

NIPFP’s Chakraborty says India’s growth recovery has been patchy due to the nature of the stimuli administered. “Our stimulus, mainly credit infusions from the central bank, has a big gap, which is uneven access,” she says.

“The really small businesses are not borrowing because they fear that uncertainty about demand may leave them with no choice but to take out more expensive personal loans to pay off their bank loans at this point.”

Bag maker Singh says even if he gets a loan, “how am I supposed to pay back a loan when there is so little demand”. His application for a loan with more favorable terms under a program announced by the government was denied.

“Other countries gave grants to small businesses, we had no support from the government,” Sunil Varghese, owner of Hevea Engineers, a small printing roller manufacturer in Chennai, told Al Jazeera. There are no cash flows and paying monthly expenses over the last two years has drained the company’s reserves.

“The survival of our 30-year-old small industrial unit is in jeopardy because of pressure from banks to return the COVID emergency loan taken out at the beginning of the pandemic,” says Varghese.

Chakraborty says the government must broaden the base of the recovery and said the upcoming budget should focus on funding and solving the humanitarian crisis rather than prioritizing fiscal correction or infrastructure spending.

“Investment is important for the long-term recovery in growth, but it is even more important that the humanitarian crisis receives fiscal attention. Capex cannot do it alone,” she says. She believes tax cuts, especially for low-income households and very small businesses, will be a quick way to boost demand.

Naturals Salon & Spa is struggling to pay salaries as clients stay away for fear of the virus [File: Company handout]

“Tax breaks will go a long way in attracting women back to salons who are staying away for fear of the virus, lower family incomes and increasing economic hardship,” agrees CK Kumaravel, CEO and co-founder of Naturals, over Salon & Spa 400 franchises in six states, all run by women, most of whom are first-generation entrepreneurs.

Business is slowly recovering 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 Rs 120 million (US$1.5 million). dollars) declined. Many of its franchisees ran out of savings and had to borrow, including by pawning their jewelry, to keep their tiny businesses afloat.

“I am very disappointed that the government remains unconcerned,” says Kumaravel.