Windfalls don’t make Economy

RBI Intervention

By Shivaji Sarkar

Some coincidences, some windfall, reworking fiscal package and falling growth rate mark the current economic developments. The transfer of Rs 1.76 lakh crore by the Reserve Bank of India to the government to fill similar gap in the revised estimates in the Budget for 2018-19 and the Economic Survey has come as either a coincidence or surprise. The Budget estimated total earning of Rs 17.3 lakh crore and the Survey Rs 15.6 lakh crore. Nobody explained the reasons for the difference in the two documents. However, a generous RBI fills that up.
This is amid announcement of a package, actually correction, by Finance Minister N Sitharaman, spread across a variety of sectors. She scrapped an angel tax on start ups, set up an organisation to boost loan support for housing and infrastructure, roll back surcharge on the earnings of foreign portfolio investors (FPI) and domestic stock market players and dropped a harsh provision that could have sent company executives to jail for failing to meet Corporate Social Responsibility targets.
The corrective steps try to restore confidence among investors. Most of them were pulling money out of the country after the July 5 Budget. The steps are undoing a wrong done. However, it is to be seen whether this boosts growth. Moody’s almost simultaneously on August 23 cut India’s growth forecast for 2019 by 60 basis points to 6.2 percent and predicts a similar fall for 2020.
The same day the CSO reduced growth rate to 5 per cent compared to 8 per cent in same period the previous year. It is the slowest growth in 25 quarters or over six years due to sharp fall in manufacturing and sluggish agricultural growth. In March, growth rate had slipped to 5.8 per cent was a five-year low.
If farm growth does not improve, despite huge cash transfers, it can have serious implications. On August 8, the RBI had pegged the growth at 5.8 to 6.6 per cent in the April-September period or first half of the year.
The FM’s step to boost the automobile sector though not unwelcome is a bit misplaced. The sector itself is responsible for the present mess. It lobbied for junking of new 10-year-old cars expecting a boost in sales. The results were contrary as the secondary market of used cars collapsed and those having old cars preferred not to buy new ones. Job losses and uncertainty looming, even the supposed cash rich IT sector staff are keeping themselves away from the market.
Voices are being raised against the government for lifting ban on official purchases of cars, while the people reel under impractical laws of impounding their vehicles. The decision may see outgo of government funds but may have little benefit on the auto sector. The government should have done away with the 10-year-junking law to boost the industry.
Another folly has been to cut bank interest rates. It helps none but the large defaulters, replica of an incentive policy of 2008 that dumped banks with huge NPAs. Interest rates in an economy that is seeing more price rises should move up to attract investments. Recapitalizing banks with people’s money repeatedly is expensive. The FM should have done away with taxes on deposits.
Strong savings regime is needed to steer the economy. The opposite is being done.
The transfer of Rs 1.76 lakh crore, 28 lakh crore already done before, from the contingency fund empowers the government to go on a spending spree. It, however, severely impacts provisioning, if the banks’ collapse.
Of course, simultaneously some of the banks are being merged to create larger entities. This overlooks the fact that RBI monitoring itself is not that strong. It took eight years to detect wrong provisioning in the second largest bank, Punjab National Bank (PNB), which has been continuously posting losses. A year ago it lost Rs 13417 crore and lost another Rs 4750 crore in last fiscal. Its gross NPA reduced marginally to Rs 78,473 crore in 2018-19 from Rs 86,620 crore a year before. IT suffered Rs 14,000 crore loss in the Nirav Modi fraud and another Rs 900 crore in the Jet Airways fiasco. The restructuring is touted to be more for window dressing.
Market-based economies thrive on hope and belief of profit. The Narendra Modi government in times of negative sentiment is increasing its expenses to boost hope. But this stimulus has a limit. The 2008 stimulus virtually ruined the economy. Modi is trying to salvage the 2008 mistake as well as trying to boost the present.
The government has taken an extreme step for salvaging the economy by drawing on RBI reserves. It is a gamble. If it can turn the table, the gamble pays. There are always chances it may not. It needs to look for an alternative and has to loosen its fist. As it is a desperate situation, the government tightened its fists, raised taxes, even income tax to an unprecedented high of 42 per cent. This calls for the salaried class to pay more in taxes pandering them to be more national.
Businesses are told give leeway. The GST, despite conceptually acceptable, has become draconian in its implementation “so that there is neither a default nor it creates black”. This has unleashed a rein of fear. In real terms, many new businesses are collapsing as penalties are more severe than the fault.
What the government is realising is not important. In the process it is killing the golden goose. No business, most of which is informal in this country, can suffer the rigour or rules. Unfortunately that is happening. High taxes, high-handed approaches, falling farm sector, contracting rural economy and pressurising systems are building road blocks to progress.
The West has been following this model for long and itself is collapsing. India blindly followed it and is virtually witnessing a collapse. Europeans want to come out of the clutches of dishonest banking, whereas Indians are being forced into it!
Every sector, auto, real estate having more unsold homes, agriculture and a mere 1.4 per cent growth in tax collection is pulling the economy down. Yes, the Indian economy needs free operation and has to break the shackles. Whatever the rationale of drawing on reserves, it will not help unless the business is allowed the freedom to flow. The bizmen and all citizens need to feel the trust of the official system in them. They are honest citizens but are branded by unprofessional official system. If Prime Minister Modi restores that trust more than half the battle can be won.—INFA