The reliefs given in personal income taxes through the last budget set the stage for reviving domestic consumption. The three interest rate cuts done this year have put more money in the hands of citizens. The GST reset for most products that get consumed in the daily life of citizens further incentivises consumption. The intent is clear: the government wants reforms to directly impact the lives of the common man.
By financializing every citizen, giving everyone access to formal banking, encouraging them to invest in mutual funds, and digitizing the financial future of every citizen, we have already made public digital infrastructure touch the lives of every Indian. Now, we are making every Indian experience lower inflation directly. This is quite uncommon. Earlier, we had inflation more as a statistic, while the ground reality was quite different. Now, with real costs going down, people will see their buying power increase. With further rate cuts on the horizon, we are set to see lower home loan rates, lower vehicle loan costs, lower interest costs on SME loans, and more liquidity in the system. The slowing down of corporate credit growth and the rising share of retail loans in total credit would mean far higher accessibility to formal credit for all citizens. This can further encourage more citizens to rely on the formal financial system for their loan needs and consume credit with more confidence.
The stage is set for consumption revival, sustained consumer confidence, and demand growth across product categories. While we still have some worries around US centric businesses, rural consumption is set to become a game changer. The share of rural consumption in overall consumption is set to rise in the coming years as the consumption boom moves beyond the top cities. Industries like automobiles, white goods, electronic products, FMCG, building materials, footwear, kitchenware, and processed foods are going to see significant shifts in consumption patterns as growth stabilizes over the next few quarters.
More importantly, the government knows that reviving consumption, putting more money in citizens’ hands, raising domestic confidence, and formalizing the economy very rapidly are central to maintaining overall GDP growth in the face of an adverse trade relationship with the USA. The government has chosen to decisively act on what is within its control even while trying to mend its US trade ties. So, focusing on the domestic economy will prepare us for any situation including a prolonged stand off with the USA on trade. But, the more interesting prospect is a potential deal with the USA that is neutral to our pre-tariff position on our exports and opening up our economy further to US products. This could be a hugely positive thing as and when it happens.
So, our government has hedged itself very interestingly. It has assumed that the Indo-US trade standoff may take time to resolve. It continues to actively negotiate with the US government. At the same time, we have accelerated domestic tax reforms, mended ties with China, reached out to many countries to open export opportunities for our firms, and managed our economic macros sensibly. If exports show a recovery in due course and the domestic economy continues to do well, we could well see domestic consumption as the big catalyst to the economy. The stage is set for a shift in the trajectory of domestic consumption and it is now time for us to show our confidence through our spending. The government has played its best hand and citizens should now take over.