The last week of August has witnessed a series of economic stimulus announcements by the Narendra Modi government, which seems to have finally accepted that the economy is in serious trouble. On August 23, Finance Minister Nirmala Sitharaman announced the first shot of the stimulus package with an upfront disbursement of Rs 70,000 crore to recapitalise banks, a set of administrative measures to speed up GST refunds and reduce meddling of tax authorities.
Five days later, Commerce Minister Piyush Goyal and Environment Minister Prakash Javadekar jointly revealed what they claimed to be the next dose - tweaks in FDI rules to attract more investment into India. On August 30, Sitharaman announced the mega merger of 10 public sector banks into four large entities. Punjab National Bank will merge with Oriental Bank of Commerce and United Bank to form India's second largest bank. Canara Bank and Syndicate Bank will merge to form the fourth largest bank. Union Bank of India will merge with Andhra Bank and Corporation Bank to form the fifth largest bank. Finally, Indian Bank will be merged with Allahabad Bank.
In between, the Reserve Bank of India (RBI) strengthened the government's ability to front-load public expenditure by handing over Rs 1.76 lakh crore as dividends and transfer of surplus reserves. If Sitharaman's words are to be believed, this is just part of an ongoing endeavour to achieve high economic growth. The declining growth in India's GDP explains the rationale behind the government move. India's economic growth has been sliding since four quarters. The Q1 FY20 GDP growth at 5 per cent, the lowest in seven years, is yet another signal to that end.
The signs of trouble which warranted these stimulus measures have been visible for some time. Automobile sales have been declining month after month for almost a year. Merchandise exports growth was more of an aberration as it remained muted or negative for several years. Almost every industrial sector, including biscuit manufacturers who cater to mass market brands, had begun to complain of lower sales, and possible job cuts. Even Bharatiya Mazdoor Sangh (BMS), the trade union affiliate of the RSS, had openly expressed concerns over job losses. The Northern India Textile Mill Association inserted advertisements in mainline dailies a couple of days before Sitharaman's stimulus package, pointing out the job losses the industry has been facing.
The stimulus package was the first public acknowledgement by the Narendra Modi government of the severity of the economic crisis. Now that the illness has been diagnosed, medicines prescribed, and treatment begun, will it provide a complete cure? Or is it going to be just a symptomatic relief?
The initial response to the stimulus has been positive, particularly from the automobile industry which was among the worst hit. "We welcome the government's measures to boost the economy and the automobile sector in particular. We are optimistic that this move will boost customer sentiment in the current market scenario and encourage customer acquisition of cars in the coming festival season," says S.S. Kim, MD and CEO, Hyundai Motor India.
Others also consider this a positive move. "The slowdown in the automobile sector was because of three broad reasons - poor sentiment, availability of finance and transaction cost for buying vehicles. The announcement will go a long way in improving sentiment because it shows the government is listening to the industry. Financing concerns have been more or less taken care of by the announcements," says Pawan Kumar Goenka, MD, Mahindra & Mahindra. He adds that though not much was done for reducing transaction costs, there were several measures that will incentivise vehicle purchase.
Rajiv Kumar, Vice-chairman of government think-tank NITI Aayog considers the stimulus package to be a comprehensive package, while Rathin Roy, member of the Prime Minister's Economic Advisory Council, believes the minister has addressed several key pain points.
Industry chambers, too, were supportive of the move. "There are some specific directives in the stimulus package which are good. A 30-day deadline for GST refunds, recapitalisation of banks and plans to facilitate long-term credit for infrastructure projects belong to this category. The government has also made many policy corrections, which should have been abolished in the first stage itself," says K.E. Raghunathan, former President, All India Manufacturers' Organisation. According to him, the abolition of angel tax, surcharge on capital gains, and other measures can do a lot of damage control.
Sitharaman categorised the initiatives announced into some broad themes. The first round of stimulus focussed on decriminalisation and reduction in harassment especially by law enforcers; encouraging enterprise and investment; supporting banking, credit, NBFCs, MSMEs, capital flows and financial markets; and the automotive sector. She said the government will continue to calibrate responses in sync with stakeholder response. NITI Aayog's Kumar believes next in line to get special treatment could be real estate, exports and tourism.
Cause and Effect
The stock markets have responded positively but the measures announced may not be enough to sustain its momentum. "Finance Minister Nirmala Sitharaman announced a slew of measures to revive the economy... However, these measures are likely to support growth only in the medium term. The announcements address cyclical problems and not structural problems facing the economy. What she has done is reversed a couple of announcements made in the Budget, and those won't help much in reviving the economy," says Sunil Kumar Sinha, Principal Economist and Director-Public Finance, India Ratings and Research. India Ratings has revised India's 2019/20 GDP growth downwards to 6.7 per cent (a six-year low) from its earlier forecast of 7.3 per cent. The agency expects FY20 to be the third consecutive year of subdued growth pushed by a slowdown in consumption demand, delayed and uneven progress of the monsoon so far, decline in manufacturing growth, inability of the Insolvency and Bankruptcy Code to resolve cases in a time-bound manner, and rising global trade tension adversely impacting exports.
Arvind Virmani, Chairman, Foundation For Economic Growth & Welfare, and a former Chief Economic Advisor to the government of India, says solutions to tackle problems are not easy because "reasons are largely structural, relating either to policies that have outlived their utility, collateral damage from policies that may have served some purpose, or just plain bad policies." The most fundamental underlying reasons, he says, are the collateral damage from "black money crusade (demonetisation)", complex GST, and from tighter regulatory and reporting norms for banks and deposit taking NBFCs.
Virmani prescribes a focussed approach towards central schemes, and introduction of the new Direct Tax Code with rationalisation of corporate income tax to 25 per cent in the next Budget and 20-22 per cent in the subsequent three Budgets. He also calls for further simplification of GST slabs. Incentivising exports is another reform measure that he suggests.
The relaxation of FDI norms, however, may not have a far reaching impact. It targets mining and single-brand retail. Even though 100 per cent FDI was allowed in mining, the current tweaks allow foreign investment in almost the entire spectrum, including commercial sales, unlike the earlier permission for mining for captive consumption.
What will help global single-brand majors like Apple or IKEA is that compulsory local sourcing norms have been watered down by bringing in contract manufacturing under the umbrella of activities eligible for sourcing set-off.
The RBI bonanza also cannot make a major difference in the spending pattern of the government, though it brings in some certainty that budgeted expenditure plans, especially on infrastructure, will not get scuttled due to lack of funds. "The surplus transfer is likely to provide some respite to the Centre's finances. But a major portion of this amount is likely to be utilised in meeting revenue receipt shortfalls emanating from weakening economic conditions," India Rating states.
RBI, which analysed prospects of the economy in its just released Annual Report 2018/19, states the key question is whether we are dealing with a soft patch, a cyclical downswing, or a structural slowdown. "A cyclical downswing will warrant counter-cyclical actions in terms of monetary and fiscal policies, but a structural slowdown will need deep seated reforms. The diagnosis is difficult, " it said.
A time-bound implementation plan for measures announced in the stimulus package is critical, but more is needed. According to the CMIE, interest of corporates in fresh capacity creation - which has already dropped - is unlikely to kick-start until there are clear signs of sustainable demand pick-up. Without private capital, the government will be constrained to push expenditure, as it has to be seen to be fiscally disciplined to avoid any major outward flow of foreign investments. That was precisely the reason why government expenditure increased by just two per cent during April-June 2019.
The RBI report says that reviving consumption and private investment has assumed the highest priority: "This may involve strengthening banking and non-banking sectors, a big push for spending on infrastructure and implementation of much needed structural reforms in labour laws, taxation, and other legal reforms."
The silver lining in the Indian economy could be that India continues to be the fastest growing major economy globally. This gives it an advantage in attracting global investments. "There is about $18 trillion of debt in the world earning negative returns. So there is a lot of money out there that could be attracted to India for high returns. The India story abroad remains very strong," says Kumar.
The ability to fight this economic slowdown may depend on the country's ability to lock such foreign capital in long-term assets and job creation investments in India.
Until then, all we can say is that the last week of August 2019 saw Narendra Modi begin a war on economic ill health. But it's too early to predict the result.