Instant relief for some, hope for others

Instant relief for some, hope for others

Finance Minister Nirmala Sitharaman and MoS for Finance Anurag Thakur during a press conference in New Delhi, Friday, Aug 23, 2019. (PTI Photo)

After an almost botched-up Union Budget, finance minister Nirmala Sitharaman has now attempted to amend some of its provisions and undo a few. She has tried hard to win the trust of the markets with a seemingly better package than the Street was expecting, but her measures may not give immediate succour to the battered economy, barring a few sections. Those who stand to benefit immediately are a section of foreign investors, start-ups and the people she needs to impress as the government completes 100 days in office.

In less than a week from now, the 100 days celebrations will commence. The central ministries have been given stiff targets. And so far, only those who have been able to nail corrupt officials and politicians have managed to gain full marks.

On the economic front, not much has been achieved. There is an added fear that official data on the country’s overall economy that will be released in the midst of a 100-day celebration will pour cold water on the festivities.

The first GDP growth number, for the June quarter, since the Modi 2.0 government took over, is expected to come on Friday. And all the high-frequency indicators and the commentary from the Reserve Bank of India have suggested that the economy has further slowed in the April-June quarter from the growth rate of 5.8% seen in January-March.

Be that as it may, Sitharaman has been able to send a strong signal to the people on the ground that she listens to all of them.

She has been able to send a signal to the markets that she has enough resources in her armoury and is willing to inject booster doses to the ailing economy, but the recuperation will take a quarter or two. The markets are exactly in need of that. It smells the economic recovery six months in advance and begins pricing products on the basis of that. The foreign portfolio investors, who had been the worst hit, will most likely start reversing their fund outflows. After all, the market has lost more than Rs 27,000 crore from their side ever since a Budget oversight brought them into the tax net.

But the slowing economy has impacted businesses, most of whom thrive on borrowed capital, expecting the profits made will be used to pay off debt. In the absence of such profits, their ability to service the debt gets minimised, which in turn creates more NPAs and leads to a further slowdown in the economy.

The immediate repercussion is job losses, a peculiar problem that India is facing now. Would that be addressed by the weekend measures announced by the finance minister? Well, she did not choose to answer a question to that effect in a press briefing, and instead, asked her secretary to respond.

Minor relief to auto, housing

Automobile and housing sectors have been louder in expressing their woes. They want immediate relief in terms of tax cuts and tax holidays. Their sales have almost come to a standstill because there is no demand from the consumers. A slowing economy has not left much money in their hands.

There is hardly any relief in the finance minister’s re-worked kitty. The postponement of increase in vehicle registration charges, making BS-IV vehicles ply on the road for a longer period, higher depreciation, government purchases to boost sales – all these can at best bring cheer to the automobile and components sector in the next six to eight months.

The rising uncertainty over global liquidity flow and the trade war morphing into a currency war can exacerbate the problem. Hence, policy levers have to be activated from both sides – monetary and fiscal. Most other economies also take a third route of currency depreciation, especially to tackle the problems arising out of trade wars. India, however, has not followed that option. So, that is ruled out for now.

On the monetary front, the RBI has handed out a decent 110 basis points of repo rate cut since February. However, it has not helped much. Monetary policy has its own limitations. Even at zero interest rate, demand for loans could be muted. In fact, when the interest rates are too low, banks’ profitability takes a hit. They begin lending to fewer people and businesses. In other words, beyond a point, the monetary policy ceases to be a stimulus. Even when the monetary policy acts as a stimulus, the first round impact is felt only by businesses and investors.

To give immediate succour to the economy and create more jobs, it is the fiscal policy that has to take precedence. It can be in the form of tax cuts or increased government expenditures to perk up demand.

However, the needle has not moved much on that front.