Focus shifts to the rural sector; moderate consumption growth is anticipated

Plans for every facet of the rural economy are available from the central government.

According to government data, in the 27 months preceding February 2024, real wages in rural areas had decreased in 25 of them (image: pexels).

According to people with knowledge of the National Democratic Alliance’s (NDA) internal discussions, the new government may include a number of measures on its short-term agenda to address the problems of rural misery and income stagnation that some segments of the population are currently facing.

The administration is considering a number of possibilities, including expanding and improving current programmes with a focus on the rural sector. In keeping with the fiscal implications, moderate tax reliefs are also being considered as part of the strategy to increase demand for consumption.

Because of the below-average monsoon, high rural inflation, and negative growth in real rural wages, consumption in rural areas is still relatively low. Real rural earnings decreased in 25 of the 27 months leading up to February 2024, according to data from the Centre for Monitoring Indian Economy (CMIE), raising the possibility that the hinterland’s recovery may take longer than anticipated.

Some reports, meanwhile, suggested that the government could hold off on revealing any more significant gifts.

It is unlikely that the administration will take significant more steps to increase demand in rural areas, according to economist Sandeep Vempati of the Bharatiya Janata Party.

“The new government ought to prioritise rural employment. In order to alleviate rural misery, it must take the required actions to promote private sector involvement in rural industries and MSMEs, according to N R Bhanumurthy, vice-chancellor of Bengaluru’s BASE University.

EY India Tax & Regulatory Services Partner Sudhir Kapadia stated, “Perhaps there is a need to further reduce the tax rate at the lower income slabs to boost disposable income and consumption at a more broader scale.” But he went on to say that the government should keep moving in the right direction towards a more straightforward tax system with few exemptions and deductions and moderate tax rates, rather than going back to the previous system with a wide range of exemptions.

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Bhanumurthy mentioned the additional dividends from the RBI and expressed his support for allocating a portion of those to state capital expenditures in order to stimulate economic activity nationwide and increase demand for labour.

The Reserve Bank of India (RBI) declared a dividend of Rs 2.11 trillion, which was larger than the budgeted amount of Rs 80,000–90,000 crore. This could allow the Centre to lower its market borrowings and fiscal deficit in FY25 or increase funding for capital projects and programmes. The additional transfer from the RBI represents around 0.4% of GDP, and if no further spending is done, it might assist the Centre in bringing down GDP from the interim budget estimate of 5.1% for FY25 to 4.8%–4.9% of GDP.

Increasing budgetary resources for the rural sector is not the answer, in Bhanumurthy’s opinion. He brought up the disastrous results of the Andhra Pradesh elections, which saw the Jagan Mohan Reddy-led government overthrown despite having invested Rs 2.35 trillion in welfare programmes over the previous five years.

Modi 3.0 will have to rely more on its coalition partners to pass controversial reforms at the Centre since the BJP was unable to secure an absolute majority. These reforms, which centre on labour and land and have been identified by the BJP as top priorities to increase India’s manufacturing competitiveness, may be more challenging to pass.

Vempati stated that this year’s rainfall will be more than usual, citing the most recent RBI Annual Report. This would support demand in rural areas. The expansion of PM Svanidhi to small towns and villages, PM Awas Yojana-Rural (PMAY-R), and PM Surya Ghar Muft Bijli Yojana, which provides free energy to low-income homes, are further initiatives that are expected to boost demand in rural areas, according to Vempati. He stated that it is important to acknowledge that the PM Garib Kalyan Anna Yojana will provide free rations to most rural residents until 2028.

Vempati continued, “We will create sustainable rural demand if we focus on being Atmanirbhar in pulses and edible oil, push for horticulture and crop diversification, provide credit to informal micro enterprises, and fillip to exports including from rural areas.”

Plans for every facet of the rural economy are available from the central government. While the Rural Jobs Guarantee Programme (MGNREGA) is demand-based, other schemes, such as those for rural homes and rural roads, are almost fully subscribed. In addition to providing 80 crore people with free food grains through a public distribution system, farmers also receive income support of Rs 6,000 per year and fertiliser subsidies of around 80%.

A suggestion to raise the financial support provided to farmers under PM-KISAN from Rs 6,000 to Rs 2,000–3,000 per farmer household may also return to the table. Currently, the Centre funds the programme with approximately Rs 60,000 crore annually. An extra Rs 2,000–3,000 crore might result in an outlay of Rs 17,000–25,000 crore, which would benefit 85 million people.

“The estimate included in the Interim Budget Estimates for FY25 is probably going to be exceeded, since the tax receipts for FY24 exceeded the RE. Furthermore, the RBI’s larger-than-expected dividend transfer would increase total revenue receipts. This could provide some budgetary leeway to accommodate increased spending, according to Icra Chief Economist Aditi Nayar.

For income between Rs 3-6 lakh and Rs 6-9 lakh, taxes are 10% and 5%, respectively. 15% and 20% of income between Rs 9-12 lakh and Rs 12-15 lakh is taxed, respectively. If your income exceeds Rs 15 lakh, you will be subject to 30% tax.