Will it help push - Start the economy?

In answer to industry and financial market demand, the government has announced a slew of wide ranging measures including tax waivers, recapitalising and de-clogging moves to revitalise sectors and push up demand. Will it help push-start the economy?

India remains the fastest-growing major economy in the world but in recent months there has been a lot of noise about its health. The automobile sector which is a major manufacturing sector and employer has reported that its inventory is piling up as there is declining demand. Even some FMCG sectors have reported declining sales due to declining consumption. For example, Parle Group has reported that it may go for retrenchment of its workforce to a sizeable extent in view of declining demand for biscuits.

When the new government was formed in May, the Sensex had gone up to an unprecedented high of over 40,000 but since the presentation of the budget, the Sensex has been falling continuously. The latest reported GDP growth figure of the last quarter of FY19 has dipped to a disappointing low of 5.8%. The vice chairman of Niti Aayog is reported to have spoken about an unprecedented liquidity crisis in the financial system. On the other hand, the government maintains that the important parameters of the economy are sound with a record foreign exchange reserve of $426.42 billion.

The government hopes to reach a $5 trillion economy in the coming five years and for this to happen, the GDP growth rate has to increase over 8% every year. This will require growth in many sectors, and to begin with, a rapid growth in credit off take will be of paramount importance. In the background of growing negativity against the ambitious target of the economy, the Finance Minister unveiled a slew of measures on 23rd August while reinforcing her full confidence in the economy. The Finance Minister said that the new measures will help in bringing about more ease in doing business and thus in reaching our targeted goal. The new measures announced are in the domains of tax relief, reviving the auto sector, funds for banks, NBFCs, MSMEs and corporates.

Boost for investors

The share market was falling after the budget announcement of a levy of surcharge on capital gains. Many FPIs exited from the capital market as the new surcharge was seen as harmful to their interest. The surcharge on capital gains, both on the long term and short term gains now stands removed. This applies to both domestic and foreign investors. The ‘super rich tax’ will be reviewed in 2022. To give comfort to taxpayers, it has been decided to dispose of all tax notices within three months starting from October. More advantage has been provided in the tax treatment of startups and even a separate cell will be set up to deal with their tax issues. The earlier announced ‘faceless scrutiny assessment’ will now start, with effect from Vijyadashmi. The government seeks to blunt tax harassment charges with pro-taxpayer measures.

Push up for auto

The government is giving relief to the auto sector by providing an additional 15% depreciation on the purchase of automobiles up to March 2020. To raise demand in this sector, the restriction on government departments and government undertakings on vehicle purchases have now been removed. The restriction was in force for many years. A new scrap page policy will be announced soon so as to do away with old vehicles with added input benefits on scrap. This will again boost the demand for the purchase of new vehicles as old ones will get cleared from the roads. The much-disliked revision of registration fee will be kept on hold until June 2020. EVs and non-combustion engines will ply and this will reduce pollution.

Balm for banks

The financial system has evoked special attention. The government will release Rs.70,000 crores for the recapitalization of public sector banks. Lending by these PSBs has to be in synchronization with the repo rates so as to benefit the public. Housing finance companies will be provided with additional liquidity of Rs.30,000 crores through the NHB. Improved one time loan settlement for MSMEs and retail borrowers has also been announced. As a measure to step up lending and increased transparency, a better tracking of loan applicants has been decided. Documents have to be returned to borrowers within 15 days of the closure of the loan. The government has taken note of the fact that there is credit squeeze due to fear, for which the government will come with a checklist system for granting loans. There will be objective criteria in the checklist and no honest banker will suffer if the loan given as per the checklist becomes an NPA.

Measures for MSMEs

While announcing help for MSMEs, it has been proposed that arrears of GST refund will be cleared within 30 days. The present law will be amended to give a clear definition of MSME. A decision has also been taken to pay 75% of the arbitration awards. Giving comfort to corporates, the painful clause on prosecution on violation of CSR has been withdrawn. Now it will be considered a civil offence. Other provisions of the Companies Act too will be reviewed to do away with criminal prosecution and in place there may be provisions for penalties and compounding.

Driving up demand

The new measures will bring about cheer in the market and in the business world, as the economy will definitely get a boost. The announced measures have kept away from adding to the fiscal deficit, except for the waiver on a surcharge on capital gains. This will ensure that the targeted fiscal deficit of 3.3% does not get derailed. The measures focus more on systemic improvement and creating demand, bringing about financial liquidity in the system. There may be growth in the credit off take and also loans may be cheaper and the same may work to boost demand.

Our economy is dependent on domestic demand and consumption and hence the problem cannot get solved unless we improve them. Injecting more money into the system and giving more disposable income in the hands of the consumers can be the surest way to create demand and for this, there has to be more spending both by the government and the private sector. Money rolled out by such spending will reach the hands of the people and they will go for both purchasing and saving more. It is slightly disappointing that there is decreasing demand and consumption as earlier we used to get confronted only with supply-side constraints and the consequent rise in inflation. Today, inflation is subdued in view of decreasing demand.

More of noise

Many FPIs exited from the capital market as the new surcharge was seen as harmful to their interest. The surcharge on capital gains, both on the long term and short term gains now stands removed. This applies to both domestic and foreign investors.

For MSMEs, it has been proposed that arrears of GST refund will be cleared within 30 days. The present law will be amended to give a clear definition of MSME. A decision has also been taken to pay 75% of the arbitration awards.

A closer look at the prevailing situation of the economy makes it clear that the situation is not that alarming and there should be no panic. A positive ecosystem is needed to negate the noise of negativity. Even if the GDP falls slightly, a positive sentiment will help us to put the economy on the upward track. The Indian economy does not stand alone and it is affected by the prevailing global economic scenario. Today, we see the two economic giants, US and China involved in a trade war. Even the WTO is not allowed to work to its full potential. The world environment in trade is becoming protectionist and this is harming all countries, big and small. Even the GDP of China is falling and its currency, Yuan, is losing its value. To a very large extent, our economy is getting hit by international conditions.

The world environment in trade is becoming protectionist and this is harming all countries, big and small. Even the GDP of China is falling and its currency, Yuan, is losing its value. To a very large extent our economy is getting hit by international conditions

Not government alone

The slowing down of the economy is not always because of the government and tax laws. The government is only a facilitator and it is a well known fact that our tax rates are not very high compared to the tax rates of many developed countries. The economy depends on the wealth creators who mainly come from the private sector. Sales of a company go up and down marginally over a period of time and that cannot be considered as a signal for alarm. A very important statement has been made by the Bajaj Auto group that the situation in the auto sector cannot be considered alarming because of a mere drop of sales by 4-5%. Sometimes the performance of the companies is bad due to internal reasons and for this, companies in should introspect and correct. There should not be unnecessary demand for lowering the GST rate when some companies do marginally bad as this will lead to chaotic cry from many other sectors. As a result, revenue collection will fall and fiscal deficit will rise, thereby worsening the economy.

Go for exports

The need of the hour is for our business sector to look within and try to go for more of exports and compete in the world market. This can be achieved if we produce quality products at a competitive price. Even smaller countries like Bangladesh and Vietnam are doing good in apparel exports, where India is lagging behind. The economy should not always depend upon the domestic market. China today excels in exports. Indian consumers too prefer to buy Chinese products which are cheaper and better than our products. Seeking government protection is not the solution. The real solution of the problem is to be innovative, qualitative and competitive. Both the private sector and the government should move hand-in-hand.

Bitter for some

There is a point of view that there is a trust deficit between the government and the private sector. If so, this may harm our economy. The government does take some harsh measures to cleanse the system from corruption and black money but that is only against the black sheep and not against business as a whole. Similarly, under the Insolvency and Bankruptcy Code (IBC), some corporates are losing ownership of their old companies but this is a pain to a few, but good for the system as a whole. IBC was legislated to cure our financial system of the mess of NPAs. There will be no liquidity with banks to give credit to the business sector, if their fund is locked in NPAs.

For the lasting improvement of our economy, it is very important that we have a skilled and hardworking workforce as a strong economy begins with a strong well-educated workforce. Peter F Drucker has said, “The ultimate resource in economic development is people. It is people, not capital or raw materials that develop an economy.” The role of the government is limited. Ronald Reagen has said, “Government’s view of the economy could be summed up in a few short phrases. If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidies it.”