Insight Delhi

FROM #DOUBLE ZERO TO #DOUBLE N

            Following the cold response to her first budget, Nirmala Sitharaman has been coming out with weekly steps, mostly announced on Fridays, to undo some of the measures announced in the budget. Two of the steps announced in the last few weeks are significant. One was the announcement on August 23 to end the surcharge on capital gains of foreign portfolio investors. This was one measure announced in the budget which had led to the foreign investors pulling out their money from the Indian bourses.

            After scoring a double zero on the economic front during his first term as Prime Minister, #Narendra Modi and his new Finance Minister #Nirmala Sitharaman are now coming out with new steps every few days in a bid to revive the economy. But increasingly, it is looking as like Alice in Wonderland, the double Ns have no clue of how to overcome the problems created by the ill advised demonetisation and shoddily implemented Goods and Services Tax, GST regime. The first union budget of Narendra Modi’s second term as Prime Minister presented by newly appointed Finance Minister Nirmala Sitharaman was remarkable for its lack of any steps to revive the economy. Naturally it was met  with a massive sell off in the stock markets.

            The second big ticket concession came from Nirmala Sitharaman on September 20, Friday again, when she reduced the #Corporate Tax rate for domestic manufacturing companies from 30 to 22 percent. In the case of newly setup manufacturing companies, the rate was reduced from 25 percent to 15 percent. The reduction in the corporate tax rate is likely to cost the government  Rs 1.45 lakh crore.

            There is now speculation that the cut in the corporate tax rates may be followed by a significant cut in personal #income tax rates.

            The Narendra Modi government has also been making noises about improving the GST structure so that it does not continue to hurt the economy, the way it has been doing so far. Its show of consultations with the states especially at the bureaucratic level is going on. It is possible that some steps to reform the GST structure may be announced sometime in the future.

            Despite the #piecemeal measures being taken and announced by  the Narendra Modi government, especially by Finance Minister Nirmala Sitharaman from time to time, there are no signs of revival in demand, which is a key factor in economic growth.

            The #Reserve Bank of India, while announcing reduction in key policy rates on October 4, another Friday, also reduced the country’s growth forecast to 6.1 percent in the current financial year, 2019-20. This would be the lowest growth rate in seven years.

            The message from international agencies is no better. #Moody’s Investors Service has reduced India’s growth forecast for 2019-20 to 5.8 percent from 6.2 percent earlier. It said the Indian economy is experiencing a pronounced slowdown. Moody’s attributed the downward slide to investment led slowdown that has broadened into consumption. It noted that there is financial stress among rural households and weak job creation.  

            The #Asian Development Bank has also reduced its growth forecast for India for the current financial year to 6.5 percent from 7 percent projected just three months back.

            Apart from reducing corporate tax rates, the Finance Ministry has been asking different ministries to speed up spending to boost growth. Steps have also been taken to fast track payment of outstanding dues to Micro, Small and Medium Enterprises.

            While adopting measures to step up growth, the Narendra Modi government’s obsession with keeping the #fiscal deficit down continues. The government will be helped in this by the Rs 1.76 lakh crore of Reserve Bank reserves to be transferred to the national exchequer. Another way in which government is trying to balance its books is large scale privatisation of government enterprises, loss making as well as profitable ones. Total disbanding of BSNL and MTNL, government’s telecom companies, which used to be profitable in not too distant a past, is on the cards. The government is also planning to privatise as many as 150 trains and scores of railway stations.

            But it is becoming clear that the steps taken by the Narendra Modi dispensation are a case of too little too late to revive the economy in the  foreseeable future. The #slowdown in the economy is deep and piecemeal steps are not likely to make much of a difference. Data released by the Reserve Bank of India shows that financing of business has shrunk 87 percent in the current financial year up to the middle of September. Bank credit growth has gone down by Rs. 3.1 lakh crore. The monetary policy report of the Reserve Bank says that the slowdown in credit growth was led by public sector banks as well as private sector banks.

            It is increasingly becoming clear that the two Ns, Narendra Modi and his Finance Minister Nirmala Sitharaman have no clue on how to revive the Indian economy. The adverse impact of the ill advised demonetisation undertaken by Narendra Modi on his personal initiative in his first term and shoddily implemented GST structure under the late Mr. Arun Jaitley continues.  

            The government needs to hold consultations with a wide range of politicians and economists of all hues to find a solution to the crisis in which the country finds itself. For that, the Narendra Modi dispensation has first of all to admit that it has gone woefully wrong in its handling of the economy. There are no #quick fix solutions.

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