A first step to revive the sagging Indian economy

As India’s economy faced a situation unprecedented in its post-Independence history, the Modi administration rolled out last weekend a stimulus package designed to boost investor sentiment and help businesses in distress.

Finance Minister Nirmala Sitharaman came up with the package after Rajiv Kumar, Vice-Chairman of Niti Ayog, constituted by Prime Minister Narendra Modi with himself as the Chairman to determine national development priorities, publicly spoke of a liquidity crisis.

Lenders having stopped funding, businesses had to survive on cash, he said. This was a situation which no government had faced previously.

“The entire financial system is under threat and nobody is trusting anybody else,” he added. “Within the private sector nobody is ready to lend. Everyone is sitting on cash.”

He referred to some measures the Modi administration had taken before the economy slowed down such as demonetisation of high-value currency notes and introduction of goods and services tax and formulation of an insolvency and bankruptcy code.

He hinted at a connection between them but stopped short of stating that these measures had adversely affected the large informal sector of the economy as also small and medium industries.

Alarm bells started ringing when the slowdown hit big sectors like automobiles and real estate. With vehicle sales dropping and dealers getting stuck with huge stocks, manufacturers felt compelled to close down or cut back production. That landed the ancillary units in deep trouble.

To boost car sales, the government put off the proposal to hike vehicle registration fees till June next year, increased  the depreciation allowance on cars bought during the rest of this financial year from 15 per cent to 30 per cent and lifted the bar on  purchase of new vehicles by government departments imposed earlier as an austerity measure.

It asked banks to reduce interest rates, passing on to customers the benefit of the cut in the rates at which the central bank lends to them.  This will make car and housing loans cheaper.

The government also decided to provide Rs 700 billion for recapitalisation of public sector banks. This is expected to improve liquidity.

To placate the super rich, the government dropped the income-tax surcharge on foreign and domestic portfolio investors with immediate effect. It also offered to review the super tax on high net worth individuals (HNIs) in 2022.

HNIs, by definition, are persons with investable assets of $1 million or more. Their number has been rising rapidly in India in recent years.

Another element of the stimulus package involves holding in abeyance the move for a total switchover from internal combustion engine vehicles to electric vehicles, pending the creation of the necessary infrastructure for dealing with scrapped vehicles.

The automobile industry cheered the Finance Minister’s announcement, which met most of their demands. There was no clear immediate response from other sectors of industry, which too were looking forward to the government to face the slowdown.

Early this month Nirmala Sitharaman had called a meeting of captains of industry to discuss measures to tackle the economic showdown.

India Inc took the opportunity to demand a stimulus package of over Rs 1 trillion to start a new investment cycle and revive the economy.

The size of the stimulus programme has disappointed those who pitched their expectations high. However, they can take comfort from the fact that Nirmala Sitharaman has held out hopes of more measures.

On one score the government provided full satisfaction to the corporate sector. It accepted the suggestion to drop the recent amendment to the Companies Act which provided for giving company officials a jail term of up to three years, beside a fine of up to Rs 500,000, for failure to spend two per cent of the annual profits for corporate social responsibility programmes.

The stimulus package will hopefully help avert job losses in the automobile and allied ancillary sectors. But at best it is a half-measure.

By withdrawing some tax proposals of her maiden budget, Nirmala Sitharaman has shown willingness to approach the task on hand with an open mind.  This is a good sign.

It is not clear how the stimulus package will impact the government’s finances. Its tax realisations last year were Rs 1,700 billion short of expectations. 

More meaningful steps are needed to push up the growth rate. The lesson from the botched up demonetisation programme is that if the exercise is not well-planned the remedy may turn out to be worse than the malady.