Rs 1,76,000 crore! It is, and was, a curious, controversial, and debatable figure. When the former comptroller and auditor general Vinod Rai estimated that this was the notional loss to the exchequer due to the 2G spectrum scam during the previous UPA regime, it jolted the nation, and proved to be one of the reasons for the downfall of the Congress and its allies since 2014. This week, when the government arm-twisted the Reserve Bank of India to transfer a similar amount from its reserves to bail it out, it rang a bell.
The RBI transfer proves that the government finances are in tatters. Last week, when Union finance minister Nirmala Sitharaman announced a slew of new measures and budget-related roll-backs, she silently acknowledged that the economy was teetering on the verge of a crisis. Growth has slowed down, investments have lost pace, unemployment is high and consumers have postponed purchases. Several key sectors such as automobiles, consumer goods, retail, and textiles are in the doldrums.
Banks are cagey to lend to industry or retail consumers because of their bad loans. Although they have come down, they are still high. The alternative, non-banking financial companies are in disarray. More important are the sentiments of Indian and foreign investors, who are shattered by the seemingly strong-arm official tactics to extract more taxes out of them. As Outlook’s last cover story (Death by Debt, Sep 2) revealed, India Inc is gripped by fear and despair.
The government has promised that its actions are the initial steps to revive business sentiments, encourage investments, propel demand, rev up growth, boost job creation and start a new era of lending. More moves are in the offing, and may be announced over the next few weeks. Deven Choksey, MD, K.R. Choksey Investment Managers, says, “These are the initial moves, not the last ones. The fact that the government is responding should perk up investor confidence.”
Madan Sabnavis, chief economist, CARE Ratings, feels that the announcements “are pragmatic and address various pain points in the economy. They will help alleviate the situation in the concerned sectors. Foreign stock market investors will be enthused and companies less worried about past proposals [like the one that corporate managers who are unable to reach CSR targets will be prosecuted as criminals]. Several operational issues have been eased. Whether this will help the slowing economy or not will be seen in time.”
Before we analyse the implications of some of the decisions, it is imperative to add that India’s economic woes are not unique. They have come in the wake of a global crisis that has engulfed nations in several continents and has impacted the Indian scenario too. For example, Indian exports were hit, apart from the slack in local demand. This has afflicted export-driven companies in sectors like textiles.
The RBI largesse can help the government in several ways. A part of the money will be used to pump in an additional Rs 70,000 crore into the banking system. This can open up a fresh lending pipeline of Rs 5,00,000 crore. There is a plan for a central monitoring system, which will safeguard the interests of bank officials if the loans go awry. With interest rates down, more money with the banks, and a low scare of victimisation of lenders, investments may move northwards.
Another portion of the RBI money can be used to step up public investments. “We say that we don’t have fiscal space for public investments. So, these (RBI) reserves can be used for this purpose,” says Rajat Kathuria, director and chief executive, Indian Council for Research on International Economic Relations. Choksey feels that it will allow the government to increase spending on infrastructure, which will put more money in the hands of consumers.
However, the downside of the RBI transfer is that the central bank may have insufficient reserves in a period of emergency. If the economy takes a further beating, if inflation rears its ugly head in the near future, or if the banking sector remains stressed, the RBI may not have enough cash to take corrective actions. In the past, as during the global financial crisis of 2008, it was the huge funds pumped into the system by the US Federal Reserve that saved the American economy from a prolonged crisis.
India Inc and wealthy professionals were enraged with the reign of ‘Tax Terror’, or the arbitrary and aggressive attitude of income tax officials to raise revenues. One industrialist said that the country had moved from ‘Licence Raj’ to ‘Inspector Raj’. The FM announced several measures to correct this. No income tax notices will be sent till October 1, 2019. From the same date, notices will be sent online in a transparent fashion to bypass errant officials.
Badly hit by the slowdown in the auto sector, Maruti has sacked 3,000 contract employees recently.
To assuage the feelings of the super-rich, Sitharaman rolled back the budget proposals to impose taxes on them. Stock market experts contend that the removal of the tax on foreign portfolio investors may not show immediate results. Apart from the tax regime, these stock investors look at the fundamentals of the economy, which decide their country-wise allocations. They could take up to three months to reverse their decisions and reinvest money in Indian stocks.
Amarjeet Singh, partner, KPMG, is happy that the angel tax on start-ups is gone. The tax was contested because officials based it on the valuation of businesses. “The start-up eco-system is not all about taxation, but the creation of an environment, where one is not dependent only on international capital. A domestic capital mechanism has to evolve,” he emphasises.
Clearly, on the tax side, the government has to implement direct tax reforms, which include corporate reforms, personal income tax reforms, and also GST reforms. There has been an incremental approach to these reforms, but they are yet to be completed. In the case of GST, experts say that the number of rates has to be reduced for better compliance. In effect, excessive differentiation has to go.
However, even attempts to revive specific sectors may take time due to the lag factor. Take the example of automobiles. The government allowed the added or accelerated depreciation of 15 per cent to enable auto companies to clear their ever-growing inventory that has piled up over the past months. It eased the lending norms for consumers who wish to buy cars and motorcycles. But experts feel that this may not be enough, or it may be a case of too little, too late.
Singh of KPMG, explains, “Some of the initiatives taken by the government to revive the auto sector are steps in the right direction, but more has to be done.” According to him, the most pressing demand of the sector was the reduction in GST of 28 per cent. He adds that despite several discussions, the government hasn’t acted on a scrappage policy that can hike demand for new cars.
Singh contends that the sector is critical because its contribution to the national GDP is in double digits. In addition, a slowdown in the sector invariably leads to a cascading effect, and negatively impacts the entire supply chain—from OEMs (original component suppliers), ancillary producers, service providers, to steel manufacturers. Both directly and indirectly, it employs almost 10 million people.
At the end of the day, the problems that plague the economy are about jobs, ours and yours. On this front, there is a huge scare. For example, A. Soundararajan, Tamil Nadu general secretary, CITU, reveals that his state has witnessed huge job losses. Over 200 companies were saddled with the slowdown; many announced two or three days a week as non-working ones, which affected even permanent workers. In all, around 50,000 small industries were closed in the state, which led to 5,00,000 job losses. And this figure is six months old. “The problem is not restricted to automobiles. It has hit the textile sector, gold trade, engineering, and retail sectors. Even sales of paan shops have reduced,” claims Soundararajan.
Vinnie Mehta, director general, Automotive Component Manufacturers Association of India, says that the job losses in auto companies are around 1,00,000. Around 300 dealers have shut shop too, leading to further unemployment. In the components segment, the figure is more than 1,00,000. With production of vehicles down by 20-25 per cent, this has logically affected the components and ancillary segments.
Mahesh Vyas, MD and CEO, CMIE, agrees that the job situation has worsened. But he is more worried about the overall unemployment rate which, according to him, is currently over 8 per cent, the highest in three years. The rate in the urban sector is 9.8 per cent and the scenario is equally dire in rural areas, with a rate of 7.5-7.6 per cent. What is discouraging for youngsters is that entry-level jobs have vanished for several reasons, including the high mandatory salary cap in some states.
What is really required, then, is to simultaneously address the structural problems in the economy and several sectors, rather than to only seek quick-fix and immediate solutions. D.K. Srivastava, advisor, EY India, says that such structural problems include long-term depletion of the investment rate and the savings rate. “Unless investments are uplifted, particularly by the government and public sector, it will be difficult to stimulate the economy because both manufacturing and services have shown declines.”
Indians expect a remedy from a government they have again voted in with a huge majority.