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Economy needs more than piecemeal approach

Last Updated 29 September 2019, 16:55 IST

The corporate tax cut is done and dusted. Now, till the time India awaits an economic revival associated with it, the government is nudging the infrastructure sectors to increase their capital spending, invest more and create jobs.

The street is unevenly divided on whether the corporate tax cut can revive the economy when a majority of the middle class does not have money in hand to spend. The arguments against this fiscal profligacy are growing by the day, raising doubts over whether the finance minister is being adequately advised over the root cause of the economic slowdown.

A UBS report suggests that even if all of the corporate tax cut is passed on to consumers, it implies a $4 billion boost (0.15% of GDP), a price cut of 0.5% in consumer staples and 1-2% for automobiles. This implies that supply-side interventions will not cure in the near term when the economy is facing an aggregate demand collapse.

But, Finance Minister Nirmala Sitharaman scarcely believes that consumer demand has even slowed down. In her two back-to-back media conferences, she has tried to send across the message that both consumption and demand are growing. The data on the ground, however, contradicts the finance minister's assertions. Let us talk about some of them.

One, there is no liquidity crisis in the system. It may be at the wholesale level but not at the retail level, said the finance minister. The RBI Governor's constant cry is that even after releasing Rs 3 lakh crore into the system this year, the transmission is disappointing. It was because of tardy transmission that RBI asked the banks to mandatorily link their lending rates with repo or any other external benchmark, so that, when the central bank eases interest rates, the loans automatically become cheaper for consumers.

Two, the slowdown of consumption and demand does not hold much water, according to the finance minister. The latest data from the State Bank of India research points to a slump in private consumption expenditure to 3.1% in the April-June period, a sharp decline from 7.3% in the same period last year.

Besides, car manufacturers have been complaining of 3.5 lakh formal job losses in the sector. Assuming a minimum salary of Rs 15,000 to each employee, it translates into a loss of thousands of crores in the consumption expenditure. If the informal job losses in the sector are added, the losses could be manifold. Similarly, other sectors like textile, gems and jewellery, leather, capital goods and others too are facing job losses.

Three, after meeting with private sector banks, which also includes micro-finance sector and other smaller lenders, the finance minister got a sense that the credit growth at their level was taking place at a handsome level of up to 40%!

The most recent RBI data showed credit growth had reached 10.3% in August, its slowest expansion in more than a year. If the credit expansion was so good, what was the need to organise 'loan melas' and rope in private sector banks in the exercise?

According to experts, loan melas to be organised in about 400 districts are expected to trigger a fresh NPA crisis in the banking system at a time when Mudra loans have already started putting pressure on their loan books. A banker, who showed his reluctance to lend to the cash-strapped NBFCs, said the current situation was nothing less than phone-a-bank-for-loan during the UPA era. The public sector banks are still reeling under close to Rs 9.5 lakh crore NPAs.

Is the problem of demand slowdown real?

Private estimates, including the Centre for Monitoring Indian Economy (CMIE) workforce data shows that the workforce has declined from 450 million to 410 million in the unorganised sector in the last three years, after demonetisation and implementation of GST.

This is one of the reasons that the demand for work under MGNREGA has increased. After losing their livelihood, the urban poor are migrating to rural areas in search of jobs. The unorganised sector constitutes almost half of India's GDP – 45%. Analysts are of the view that the demand slump first originated in this segment, which employs over 80% of India's population. It then percolated down to urban areas. The rural job losses were abrupt after the cash ban. The use of credit cards is still an alien concept to the vast majority of the rural populace.

Low purchasing power

So, the supply-side measures to perk up the economy would be more effective only when the purchasing power of an average middle class, both in urban and rural areas, is enhanced. Building rural roads, hospitals and schools can employ more people and result in increased demand for the labour force. Raising urban infrastructure does not employ much of the workforce due to mechanisation.

The measures that the finance minister has now taken on the corporate tax front would not increase demand but raise the fiscal deficit. Giving more money in the hands of unorganised sector or salaried class directly would also increase the fiscal deficit but will also have a multiplier effect on consumption and demand for goods and services.

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(Published 29 September 2019, 15:49 IST)

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