Vishal Sharma
Indian economy is facing its biggest slowdown in the last 24 quarters. From a little over 8 % GDP in 2015, it is now down to 5 % in Q 1 of the current fiscal. Even this figure is not being believed by some eminent economists. They point to the tweaking of the GDP principle that this Government has done recently in support of their argument. Their assertion is that the GDP figure is lower than that being put out by the Government in the public domain. If their argument were to be believed, then Indian economy has hit the roughest patch in its recent history. In fact, to call it a slowdown will be a euphemism. This could well be a recession!
Whether this downturn is cyclical or structural will only be revealed by the impact the steps that the Government has announced recently bring about. Cyclical slump is overcome by the countercyclical measures, but the structural dent requires systemic reforms to address it. It also takes longer to be corrected. Everybody’s hope at this point of time, much more the Government’s, is that it is a cyclical thing.
The reforms announced by the Government reflect that the Government knows it is up against the wall. It has been all this while in a denial mode. It could no longer hide behind the rhetoric that the economy is doing well. Q1 figures of the current fiscal have forced its hand to rethink its existing thought process. Criticism forces the governments to relook their policies. But it appears that this government only hardens its stance in the face of criticism.
If there is an economic slowdown, the elementary prescription is to trigger demand. And there is only one way of demand generation: put more money in the hands of the people. How does one put more money in the hand of the people? Well, by cutting down on taxes-both direct and indirect. The whole idea is to get people to spend in the market. If there are more spends, more products will have to be manufactured, which means industries will have to work more to produce more to meet the rising demands. This will cause industries to either employ more people or continue to keep the ones they have on rolls, if they are deemed sufficient, to produce goods to meet the supply obligations. This is a virtuous cycle which keeps the wheels of economy going.
Government, on the other hand, has been obsessed with containing the ballooning fiscal deficit by enhancing the tax inflows. This is a recipe for disaster in a slow down. India already has some of the higher tax rates in the world. Reining in fiscal deficit should, therefore, be the least of India’s priority at this hour.
Nirmala Sitaraman, union finance minister, has announced a few steps, but they are a few and far between and also come late in the day. Removal of surcharge on FPIs is no doubt a good step. But what about lowering the corporation tax? And yes! How about abolishing income tax in toto and also reducing the indirect tax to an extent where consumption appetite is triggered in this vast country in such a manner that tax abolition or reduction is more than offset by the multiplier effect the massive rise in consumption that will ensue will have. Has anybody quantified the consequential result? After all how much are the direct tax inflows to the GoI coffers any way?
It’s time for India to rethink the income tax especially in view of the limited number of filers and its overall contribution to the tax coffers. Despite the best of the Government efforts, the accretion to income tax has not materialized to the levels expected. This also in a way explains the tendencies of tax avoidance that prevail in Indians. The best way to get the money out of the pockets of the Indians is by getting them to consume things and then pay tax on the consumption. Imagine the money that will be available with the people to spend in the event of the abolition of the income tax and the consequential effect it will have on demand generation!
The Indian banking system will be better off with the merger of the public sector banks. This reform was long overdue. In fact the government should have gone a step further and privatized them. Governments should not get into the business of lending and holding deposits except where it is necessary like in the areas where the private banks would not like to venture for reasons of profitability. This government gives a feeling that it does not want to go the whole hog in the matter of reforms. There is tentativeness, not surefootedness in whatever it is doing in the realm of economics.
Despite this, having fewer banks is a far better proposition than having many serving largely the same objective. Consolidation will result in stronger balance sheets with more money to lend, fewer staff and easier administrative superintendence. Although, it is half a reform, it is still one that will be impactful. There is no time for this government now to even give the impression that it is engaged with the issue of reforms. It does not have that luxury. This is its second term. It may be doing remarkably well politically, but economically it does not have god grades to show.
With the political capital it has, it should shed its inexplicable inhibition on reforms. It must move quickly to allow FDI on multi brand retail just as it has allowed in single brand retail. It should tell the Indian retailers to pull up and compete and not hide behind the government’s shield. Competition will breed creativity and innovation. Protection will only engender mediocrity. Similarly, it should quickly initiate labour and land reforms to allow the foreign investors to feel comfortable in the Indian markets. It can bring about the ordinances to push these reforms and later have the parliament thumb it up. This government should not fear the political opposition in economic sphere just as it has not in the field of politics.
Lastly, RBI has done its job by easing the monetary policy and asking the banks to pass on the reduced rates to the consumers. Although banks have been reluctant in passing on the benefit of the reduced rates due to liability issues as the deposit holders are not willing to agree to the reduced rates on deposits, they have still for the most aligned their lending rates with repo rates. The monetary policy fix of the economy is therefore well applied. It is the fiscal side of the economy that has suffered from lack of appropriate interventions. It’s now the government’s turn to do its job. The economy needs a fiscal push and it must provide one. It should shed its fiscal deficit fears and inject liquidity into the system by way of both recapitalisation of banks as well as enhanced infrastructure spends. In this context, the RBI’s dividend payment to the government of Rs. 1.74 lakh crore will come as handy. The government should use it judiciously to do the fiscal push that the economy is so badly missing.
( The writer is a Fellow of the Milken Institute of Financial Markets, Washington DC)
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