Insight Delhi

#Budget Rollback may not lift the economy

           

Faced with widespread criticism of the economy stagnating and the stock markets tanking, the #Narendra Modi government has rolled back several of the new provisions enforced through this year’s Union budget. The most significant was the surcharge on tax on #foreign portfolio investors as well as domestic enterprises. This had resulted in an almost continuous decline in the stock markets since the presentation of the budget by Finance Minister #Nirmala Sitharaman.

            The foreign portfolio investors withdrew tens of thousands of crores of rupees from the Indian stock exchanges. This resulted in the stock market indices tanking despite compensatory buying by domestic mutual funds.

            Nirmala Sitharaman has  announced several steps to jack up liquidity in the markets and cheaper retail loans. Public sector banks will be recapitalized with additional equity of Rs. 70,000 crore. This, the government hopes, will result in Rs. 5,00,000 crore of loans becoming available to the general public as well as people trying to keep their small, medium and big enterprises afloat.

            Steps have also been taken to bring about a regime of cheaper retail loans and a more friendly treatment at the hand of the tax collection machinery.

            The question is whether the steps announced by the Narendra Modi government will give a push to economic growth or not. Whether it will revive the animals spirits in the economy.

            Have no doubt that the stock markets, when they open on Monday, August 26, after the announcement of the #partial rollback of some budgetary provisions at the weekend, will have a gap up opening. This is because the foreign portfolio investors will have no reason to hold back money from the Indian markets when they can get better returns there than in US and European markets.

            But will the stock market reaction mean any basic change in the fundamentals of the Indian economy. The answer sadly appears to be in the negative.

            The decline in the Indian economy triggered by ill-conceived measures like #demonetization and implementation of Goods and Services Tax, GST, without adequate preparation, continues to bedevil the economy. The basic problem is the lack of demand and the unwillingness to go in for discretionary spending. There are reports that in the rural areas, people are thinking twice even before purchasing a pack of biscuits costing just Rs. 5.

            During its first five years, the Narendra Modi government focused only on keeping the fiscal deficit down. This resulted in purchasing power going out of the hands of the consumers. Added to that, demonetization completely sapped the confidence of large sections of the Indian people, resulting in unwillingness to spend on anything other than the basic necessities.

            Unless the ruling dispensation puts more money in the hands of the consuming public, the prospects of revival of the Indian economy appear to be bleak. The stock markets will rise but the economy may sink further.

            Faced with widespread criticism of the economy stagnating and the stock markets tanking, the Narendra Modi government has rolled back several of the new provisions enforced through this year’s Union budget. The most significant was the surcharge on tax on foreign portfolio investors as well as domestic enterprises. This had resulted in an almost continuous decline in the stock markets since the presentation of the budget by Finance Minister Nirmala Sitharaman.

            The foreign portfolio investors withdrew tens of thousands of crores of rupees from the Indian stock exchanges. This resulted in the stock market indices tanking despite compensatory buying by domestic mutual funds.

            Nirmala Sitharaman has  announced several steps to jack up liquidity in the markets and cheaper retail loans. Public sector banks will be recapitalized with additional equity of Rs. 70,000 crore. This, the government hopes, will result in Rs. 5,00,000 crore of loans becoming available to the general public as well as people trying to keep their small, medium and big enterprises afloat.

            Steps have also been taken to bring about a regime of cheaper retail loans and a more friendly treatment at the hand of the tax collection machinery.

            The question is whether the steps announced by the Narendra Modi government will give a push to economic growth or not. Whether it will revive the animals spirits in the economy.

            Have no doubt that the stock markets, when they open on Monday, August 26, after the announcement of the partial rollback of some budgetary provisions at the weekend, will have a gap up opening. This is because the foreign portfolio investors will have no reason to hold back money from the Indian markets when they can get better returns there than in US and European markets.

            But will the stock market reaction mean any basic change in the fundamentals of the Indian economy. The answer sadly appears to be in the negative.

            The decline in the Indian economy triggered by ill-conceived measures like demonetization and implementation of Goods and Services Tax, GST, without adequate preparation, continues to bedevil the economy. The basic problem is the lack of demand and the unwillingness to go in for discretionary spending. There are reports that in the rural areas, people are thinking twice even before purchasing a pack of biscuits costing just Rs. 5.

            During its first five years, the Narendra Modi government focused only on keeping the fiscal deficit down. This resulted in purchasing power going out of the hands of the consumers. Added to that, demonetization completely sapped the confidence of large sections of the Indian people, resulting in unwillingness to spend on anything other than the basic necessities.

            Unless the ruling dispensation puts more money in the hands of the consuming public, the prospects of revival of the Indian economy appear to be bleak. The stock markets will rise but the economy may sink further.

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