Why is this relevant to you, the MBA student?
To begin with, it's the budget. A current affair that you need to be aware of. Also, no matter what domain you may be specialising in, knowing the economic challenges faced by the country in 2021 makes for interesting reading and is good to know!
So here goes. India being a huge untapped digital market, fundraisers and managers always spoke about the country's consumption potential. But India's consumption spending has declined significantly over the years. Even more so during COVID. What this essentially means is that Indians don't have enough money (read disposable income) to spend on items other than basic necessities and essentials. Big ticket items, especially, are not something Indians can afford to purchase. You might think this to be true for rural India. But even among urban Indians, the propensity to spend on big-ticket items appears fairly low, a recent online survey of nearly 10,000 respondents spread across 203 cities and towns shows.
The pandemic just exacerbated an already existing problem. While experts suggest that thanks to the vaccine, the spending on consumption could improve, this will not make a dent in the negative numbers. It all depends on the labour market catching up and healing too! But what this definitely exhibits is that if Indians are not spending, then initiatives like 'Make in India,' too will not really flourish. The circle of income and expenditure not working well is dangerous for an economy and can lead to a recession, instability in the markets, etc.
The revival of consumption spending will depend on how soon Indians can get their jobs back. Over the past few years, the ranks of the salaried class had swelled, even if at a slow pace. The pandemic though, has led to a sharp decline in the ranks of the salaried class, data from CMIE’s household surveys suggest. In fiscal 2020, 21% of the workforce surveyed were in salaried jobs. This figure fell to 17% in the September-ended quarter last year and only rose marginally to 18% in the December-ended quarter. (Source: LiveMint Article)
But in order to create new jobs, more money needs to be pumped into different sectors by entrepreneurs and investors. As a share of India’s gross domestic product (GDP), new investments are expected to fall to 24% this fiscal, a 20-year low. The investment rate had peaked at 36% of GDP in 2007-08 and has seen a steady decline since then. (Source: LiveMint Article). Besides, a lot of investors have been risk averse when it comes to pumping in funds in the Indian economy. Lack of funds is a major problem we face today.
Then there is the bad loans and the credit drought. The country is facing a credit drought as enough money is not being pumped into the economy. Lending and borrowing from financial institutions and banks have also been adversely affected during the pandemic. Stress test results published by the Reserve Bank of India (RBI) in its latest financial stability report suggest that the share of bad loans could shoot up to 14% by September 2021, nearly double what it was in September 2020. (Source: LiveMint Article).
All of this means that lending is going to be a challenge for banks and NBFCs. After all, banks especially need some security before they invest or lend against assets! Consecutively, Indian banks are not equipped to handle investments in the next financial cycle.
Finally, with consumption, investments, and exports all malfunctioning, the government has a real challenge this budget, to raise prices with inflation. All of these factors are interlinked. These are the challenges the FM will have to keep in mind during the budget.
What do you think? How do you think the government should treat prices, especially when commodities are getting expensive globally? Is investing in gold to hedge bets a smart economic move? And how can the job situation be improved at scale? Share your thoughts, opinions, and suggestions in the comments section below!
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