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RSTV: THE BIG PICTURE- REJUVENATING ECONOMY

RSTV: THE BIG PICTURE- REJUVENATING ECONOMY

RSTV

 

Introduction:

Listing the major interventions by the govt to boost the economy Finance Minister Nirmala Sitharaman has said govt will continue to take measures as and when required to boost the growth. In a press conference Chief Economic Advisor KV Subramanian gave a recap of measures taken by the govt since August which include moderation of interest rate, infusion of liquidity through various means , capitalisation of public sector banks and giving last mile funding to reality projects. He also said that Govt’s schemes to support NBFCs and HFCs and restarting stalled real estate projects are also likely to start disbursing funds soon

 

Steps which are already by the government:

  • The government slashed the corporate tax rate to 22 per cent from 30 per cent for existing companies, and to 15 per cent from 25 per cent for new manufacturing companies.
  • Including a surcharge and cess, the effective tax rate for existing companies would now come down to 25.17 per cent from 35 per cent which involved an outgo of ₹45 lakh crore.
  • The government also brought changes in IBC where now NBFCs With ₹500 Crore Assets Can Go For Insolvency Resolution bringing the finance companies under the ambit of insolvency. Its already notified and DHFL is already in NCLT. This came against the backdrop of the ongoing liquidity crisis in the NBFCs that has also sparked concerns about the overall stability of the financial sector.
  • Under the NBFC liquidity injection response of the government , there have been steps. Public sector banks have been sanctioned to purchase ₹21,580 crores of pooled assets as on October 16.
  • Moreover, the National Housing Bank has also extended ₹30,000 cr worth of credit lines to NBFCs.
  • Housing sector received maximum attention like NBFCs during these six months. The Centre had announced a ₹25,000 crore stimulus package for the ailing real estate sector earlier this month.
  • Sitharaman had announced that the government plans to give impetus to the housing market to revive over 1,600 stalled housing projects covering 4.58 lakh units and now this window will be operational in two months.
  • The decision will also generate considerable employment, revive demand of cement, iron and steel industries and relieve stress in other major sectors of the economy, according to the government.
  • On the mega merger of 10 PSU banks which was also a marquee announcement in these six months, the mergers have been moving on with various approvals to start new structures as on April 1, 2020.
  • The PSU Banks have also been capitalised with ₹55,250 crore bonds. However, Credit growth to the industry decelerated marginally to 3.4 per cent in October 2019, from 3.7 per cent in October 2018, according to the Reserve Bank of India’s (RBI’s) sectoral deployment of credit data.
  • The government has also gone some steps towards meeting the huge disinvestment target where it took decisions on privatising BPCL,Concor and SCI along with the decision to pare stakes below 51 per cent without losing PSU characteristics.
  • But it should be noted that the measures taken by the government are still not sufficient.

 

Causes of the slowdown:

  • The slowdown in the economy is because of the shortage in demand.
  • In India’s context the demand came from government spending and credit expansion and since last couple of years they both are under stress.
  • Shortage of money(income problem)- While currency in circulation is not a problem, the money that much of the formal economy uses for transactions, and sees as bank deposits is not finding its way to the market.
  • Lacunae with financial systems- Our Financial system which converts base money to M3 is not functioning smoothly. When banks give new loans, they “create” money. When the financial system is not functioning effectively, this process of money creation slows down, failing the money multiplier effect. This can be seen in the failure of banking sectors to extend loans to credit seekers in the era of increasing NPAs.
  • The government has restrained itself from spending due to fiscal deficit targets.
  • Recent failure of Non-Banking Finance Companies (NBFCs) which had stepped in to support credit growth has resulted in restricted growth to ensure survival, as a result of which systemwide credit growth has slowed sharply.
  • Failure to address the issues- Government has also failed in addressing these issues as there is a general apprehension of running into the risk of another build-up of bad loans.
  • Consumer sentiment is extremely low.
  • Jobs are created but not long term jobs which can stimulate the economy.
  • There has been a reported drop in the households financial savings to GDP ratio in 2017 to 9.4% highlighting the fact that there aren’t enough savings available for both the government and the private sector to be funded adequately, which further impedes the growth.
  • There are several other challenges such as a weak and ailing real-estate market, problems in agriculture, worrying levels of external dependence in India’s energy ecosystem, crumbling municipal infrastructure, and stagnating capital flows, among several others.
  • Complex GST’s reforms have affected the small businesses more.
  • Black economy has gone down but the white economy has not picked up.

 

Measures required to revive the economy:

  • The government should address the growth slowdown concerns; free up funds for investment and spending by banks, housing finance companies and MSMEs; and importantly, undo some controversial proposals, in the budget and outside it, which were affecting sentiment in the markets and the corporate sector.
  • Promote the ease of doing business and even the ease of living for ordinary citizens.
  • Restricting imports by the government should not be done because it is anti-consumer and overall raises the cost of production.
  • The issues surrounding auto sector must be addressed – he accelerated depreciation of 15% (in addition to the existing 15%) for all vehicles acquired till March 31, 2020 and the deferment of the proposed increase in registration fee for new vehicles to June 2020 are positive measures that will boost sentiment and, it is to be hoped, translate into demand.
  • The Reserve Bank of India (RBI) can quickly increase the amount of cash in the economy.
  • We need to follow expansionary fiscal and monetary policy.
  • Prioritize growth now than inflation target.
  • Then banks, especially public sector banks, can use that together with interest rate policy to provide easy credit. A larger supply of credit should lead to cheaper credit.
  • Direct tax code reform is very important for small businesses.
  • This will have to be supported by reduction of the administered price of credit, which is the RBI’s repo rate.
  • There could be hurdles to credit off-take due to fiduciary or prudential reasons, so those need to be tackled. Same for mismatched expectations.
  • Higher liquidity and disposable income, and increased employment can pull us out of the problem.
  • Reduction and reform of direct individual and corporate taxes, and indirect taxes.
  • Labour laws reforms, land reforms and agriculture reforms also need to be amended to generate employment.
  • The government needs to hold granular conversations with the private sector.
  • A skills and industrial policy which can make full use of an abundant pool of reasonably priced labour

 

Thus it is clear that the economy needs to be addressed based on the ideology of reform, perform and transform in totality to overcome the current challenges of slowdown.