The fact that Prime Minister Narendra Modi, in the course of his Independence day speech, mentioned the 5 trillion dollar economy that India could become by 2025, when it was in fact sagging and slowing, has given fresh impetus to the feeling that a massive dose of stimulus may be injected into it, sooner than later. There are even expectations that some measures could be announced by Monday.
Modi is said to have conveyed his expectations of quick steps that the Finance Ministry needs to take in order to keep the morale of people and the confidence of its industry and business high when there was general gloom. The RBI's recent consumer confidence survey, it may be mentioned, spelt pessimism in terms of jobs, ability to spend and the overall economic situation.
It may or may not count as a “fiscal stimulus”. But when the economy is down and set to go further down, even a small step by the Finance Ministry may be seen as intended to stopping the southward trend, if not making it revive. And so it is that the ministry's statement on August 13, announcing a Partial Credit Guarantee by the Government of India to public sector banks, was seen as the first of more steps to follow. The guarantee will amount to one lakh crore rupees.
The one-time guarantee is intended to enable the PSBs to purchase high-rated pooled assets from financially sound Non-Banking Financial Companies and Housing Finance Companies – NBFCs and HFCs. The idea is to prevent the otherwise solvent NBFCs and HFCs from resorting to distress sale of their assets in order to meet the commitments. As the Ministry statement read, “It is expected that this measure would provide liquidity to the NBFC sector and in turn, enable them to continue to play their role in meeting the financing requirements of the productive sectors of economy including MSME, retail and housing.”
The announcement came a day after industry leaders under the banner of ASSOCHAM met Finance Minister Nirmala Sitharaman and its president B.K. Goenka announced that they had discussed ways to revive growth, saying that the economy needed “a critical intervention by introducing a stimulus package”. They suggested a package of over one lakh crore rupees. Incidentally, they had raised the issue of NBFCs, and said that issue was impacting the automobile sector, home loans and the MSME sector.
Post that meeting came a hope that the RBI would ensure banks transmitted the lowered interest rates to borrowers, that the tax on income over Rs 5 crores and Rs 10 crores that was announced in Budget 2019-20 would be rolled back, and that the government will not pursue the punitive penal provisions on account of non compliance with CSR spending mandated under the Company Law.
But how does the government roll back the contents of the Budget that has been passed in both houses of Parliament? That is also being looked at.
Members of the industry body expect a review and revision of the GST for the automobile sector which is seen as the worst hit as of now, and the cess on purchase of vehicles would be abolished, at least for now.
But the Finance Minister remains optimistic that the slowdown will pass. “On automobiles, the finance ministry has had a constructive dialogue...The slowdown is transient, accentuated by credit constraints, some regulatory changes and passiveness in demand. I believe that both demand and the industry will bounce back strongly and soon,” tweeted Sitharaman three days ago. She allayed fears that the push towards electric vehicles will hit the existing automobile sector, saying, “I would like to assure everyone that India has a large...market...big enough policy space to ensure growth of internal combustion engine (ICE) based automobiles...and electric vehicles (EVs). There is no need to speculate about the growth of either of the two.”
The Finance Minister has also remained resolutely optimistic on the issue of domestic demands which are moving downward, threatening to affect the economy more. According to her, the domestic demand was being curtailed because of credit constraints, and the vicious cycle, she said, was at its last stage.
She also allayed fears of the FDI decision making by global companies influencing FDI capital controls that India has, saying that capital controls against FDI are gone in most sectors. The recent fall in the capital markets has been attributed to the FDI pull-out.
The government will clearly not just pump in money to revive the economy, given that its focus continues to be on improving competitiveness and the ease of doing business.
Those in industry say nothing short of the government pumping in money into sectors like infrastructure or announcing tax incentives for private investors in the sector — along with ensuring credit availability through PSBs — will work.
“The government is concerned about the economy. The PMO is monitoring all the sectors,” was all that a PIB official would say, suggesting that we wait and watch.
Captains of industry and economists believe that even if the tax revenue is not increasing the way government hoped it would, it does have leeway when it comes to tackling the fiscal deficit. This, even though the RBI recently brought down the growth rate from 7 per cent in June to 6.9 per cent.
The spokesman of an industrial chamber pointed out that the Fiscal Responsibility and Budget Management Act allows the government to deviate from the fiscal deficit target by up to 50 basis points.
Economist Rakesh Mohan in a recent study highlighted “the need to revive animal spirits in the private sector to rekindle investment, particularly in an internationally competitive manufacturing sector.” According to him, this would need the maintenance of a realistic competitive exchange rate, along with the implementation of long-overdue bold land and labour reforms, incentivising labour using manufactured exports, and a focus on industrial research and development.
These are not really stimulus as industry understands it, but yet, they may be the step forward.
