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Stimulus package: case of too little, too late

By DM Deshpande

At last the government has woken up to the reality of an unprecedented slow down of the economy. Admission of this tacit fact is good news; not so good is tentative, halfhearted and inadequate policy response. The slide in the economy has been further triggered by the Budget on July 5.

Some of the irritant proposals of the budget have been withdrawn, for good such as surcharge on income tax of both foreign and domestic institutional investors.  But the damage seems to have been done already. Since June, markets have fallen 10 per cent. Small and mid-cap scrip’s have declined even more steeply without support from investors.  FII’s have withdrawn a massive US $3 billion from the equity markets within a short period. The continuous decline in markets has played havoc with investor sentiments. It has lead to tremendous erosion in wealth of individuals as well as institutions.

Nothing seems to be going right for several businesses. Export environment has worsened and the crisis in NBFC sector has hit lending even by commercial banks. Small medium industries are facing difficult times. It is good that the FM has directed expeditious release of payments that are outstanding in respect of various central projects and other vendors. States too, must follow suit. It will at least ease the burden a bit and help in reviving the economy in a small way.

The so-called angel tax on start-ups has finally been removed. One of the most hated levies it was a bad idea of the previous UPA government. Logically flawed because it treated money raised by fledgling firms as income there was no justifiable reason why it remained in the statute books for seven long years.

Automobile industry is arguably the worst hit with July sales plummeting 36 per cent. Not only is the size of this industry huge but it also supports a huge network of ancillary, auxiliary and component units. The FM has announced that the government will buy a large fleet of cars. She has granted a relaxation of sorts that cars purchased now will not become ‘illegal’ next year when more stringent emission norms kick in. No auto major is in a hurry to return to production of normal times on the promise of the government. They are carrying huge inventories which have piled up over last several months. They are up against depressed consumer incomes and not enough lenders in the market. Demand for commercial vehicles is only ‘derived’, hence, basic demand for goods and services is poor, so is the derived demand for trucks, tractors, buses etc.

The FM has also announced that PSU banks would be given an equity infusion of Rs700 billion. It is a big amount but the stacked up bad and doubtful debts of just 16 companies aggregate Rs 2.4 trillion. Half of this is said to be sum advanced to shadow banks that are now in trouble according to Credit Suisse. Obviously, there is only one way out, that is, banks will have to take a big haircut to come out of this mess. In which case, how much will be left for them to lend is any body’s guess.

There is also an issue with rates at which banks are willing to lend. The RBI has mandated that lending rates be linked to it’s policy rates.  Banks will try and at least avoid reducing rates to existing borrowers. Barring one or two honorable exceptions, rest of the PSU’s do not have strengths to speak of, except their network, which in any case do not count for much in a digitized world.  

By sheer size and diversity, India is better suited than any other nation, to fill the gap which has resulted due to China yielding ground post trade hostility with US. But government has to create conditions in which business starts and operates without hassles. Besides other things, government has to come out of the criticism of tax overreach. A re-look at GST rate in the light of slow down is in order.   

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.

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