7 PM | Centre must loosen purse strings| 3rd September, 2019

Context: present slowdown of economy

More in news:

  • Asia’s third largest economy expanded just 5.0% year on year, official data showed on Friday, far below the 5.7% forecast in a Reuters poll of economists
  • Auto industry body SIAM on Monday sought immediate steps from the government, as sales continued to plummet with passenger vehicle makers witnessing a decline of 30 per cent off take in August 

Reasons for economic slowdown:

  • Jolt of reforms: demonetisation happened in November 2016, dealing a severe blow to consumption, leading to a vicious cycle of job loss and lower income, which led to further drop in demand.
  • Goods and Service Tax (GST) introduction: next shock came in the form of a reform-when GST was rolled out in July 2017. This had a knock-on effect on exports growth in the year of implementation because of delay in refunds to exporters
  • Tight fiscal and monetary policies: the combined fiscal deficit of the centre and states is very high. And the government committed to lowering its fiscal deficit, it left little room for government to increase its spending to pump up the economy.
  • And monetary policy was focussed on inflation control, which ensured interest rates remained hard.
  • Bank NPAs: most Public Sector Banks are saddled with high Non Performing Assets that have resulted in them tightening lending and instead, seeking deposits and otherwise repairing their balance sheets by making provisions for Bad Loans.
  • Absent recapitalization: of such banks by the government, one might very well see a vicious cycle wherein bad debts and demand collapse lead to no lending and no fresh investment in addition to any consumption.
  • Global slowdown: the most important factor is that there is also a global economic slowdown that is happening and given the fact that India is a net commodity exporter, there has been a slump in the volumes of exports.
  • With the US-China trade war, global sentiments have remained poor, making the prospects of an export led growth bleak. Add to that, a looming Brexit.
  • Farming crisis: Non-food inflation continued to surpass food inflation in the past two years, amounting to income transfers from rural to urban areas.
  • Retreat of globalization: Apart from that, the global slowdown has also been accompanied by a retreat of globalization which has resulted in FDI or Foreign Direct Investment being only in the areas of speculative finance and distressed assets purchases rather than into investments that help the Real Economy.
  • Structural transformation: the slowdown is also part of a longer-term structural shift wherein the Economy is shifting gears from the high investment era to a low investment era as well as a transition from being cash-driven economy to a digitally enabled economy.

Measures taken by the government to improve the slowdown:

  • Tax Incentives: The Central Board of Direct Taxes (the CBDT) has provided in a recently issued notification, that an investment fund set up by a Category-I or Category-II Foreign Portfolio Investor (FPI) registered with the Securities and Exchange Board of India (the SEBI) need not satisfy the investor diversification conditions stated in the ITL to qualify as an EIF.
  • Additionally, the CBDT has specified the list of countries in which the investment fund should be established, incorporated or registered to be eligible for benefits under the safe harbor regime.
  • Recapitalization: The government on Friday announced a fresh capital infusion of about $10 billion (Rs. 70,000crore) into debt-burdened state banks and credit guarantees to support shadow lenders in a bid to boost lending and revive the economy.
  • SME payments: SME payments are to be streamlined with a one-time settlement plan in place and the government is to ensure that it makes its payments on time for projects (over Rs 40,000crore is stuck in the pipeline).
  • Sectoral measures: The auto sector is to get some relief on depreciation on vehicles and the government has clarified on the validity of registration on Bharat IV vehicles, the government will now be buying new vehicles, which was barred earlier.
  • FDI measures: The FDI rules now give single brand more breathing space in terms of local procurement and setting up of physical structures. Also, 100 per cent FDI through the automatic route in coal mining and related activities has been permitted.
  • As has 26 per cent FDI under the government route for uploading/ streaming of news and current affairs in digital media. However, these rules take time to work out and one does not expect to see a flurry of capital flows.
  • Mergers: in the biggest consolidation exercise in the banking space, the government announced four major mergers of public sector banks, bringing down their total number from 27 to 12, a move aimed at making state-owned lenders global sized banks
  • The merger of PSBs will unlock new potential. Big banks with their national presence and global reach will have larger credit appetite and ability to measure risk.

Way forward:

  • What is definitely missing from the policies announced so far is a direct stimulus in terms of financial outlays from the Centre. This is critical, as the problem is deep on the demand side.
  • Making “doing business” easier is a positive, and creating mega PSBs a progressive step. But this cannot change the 5 per cent growth number immediately. Money has to be spent and a fiscal compromise is required. Or else, we will continue to walk the path of gradual upward movement.

Source: https://indianexpress.com/article/opinion/columns/rbi-fundtransfer-india-gdp-growth-economy-modi-government-5960059/.

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