Overhaul, a long wait?

Reviving Economy

By Dhurjati Mukherjee

In recent times, the Government has been taking various steps to revive the economy. More so, as there are unmistakable signs of slowing down and growing nagging misery — low demand, absence of private investments, rising unemployment and stagnating production in many sectors of the economy, including the agricultural sector, where wait farmers are in acute distress. But the big question remains: how soon will the revival take place?
As part of the process, one of the boldest initiatives has been taken— a massive Rs 1.45 lakh crore tax bonanza, which will see the tax rate come down from 22 per cent (effective 25.17 per cent with cess and surcharge) from over 34 per cent at present, while manufacturing companies can opt to pay only 15 per cent (17.01 per cent effective) if they don’t avail exemptions and incentives and start production by March 2023.
Another significant move has been the directive to banks to organise loan melas in 400 districts across the country to ensure that everyone who seeks a loan gets it. In the first phase, till 29 September, 200 districts were to be covered and the rest are expected to have the melas from October 10-15. Not since Congress Minister of State, Janardhan Poojary, launched his infamous loan melas in the early 1980s has anything similar taken place on a massive scale. It is understood that melas will cover retail customers, agriculture and micro, small and medium enterprises sector.
Recently, Union Finance Minister Nirmala Sitharaman has asked infrastructure ministries to prepare their capital expenditure for the next four quarters and fast-track pending payouts to various agencies to boost capex in the economy. The move is, no doubt, a welcome development as it comes amid concerns that the government’s capital expenditure could be lowered due to the revenue loss on account of tax cut.
Though a small section of conservative economists believe that the market system can, given a little bit of time, recover automatically from its ailment of unemployment and low levels of output. There are other economists who believe that this process could take a long time to return to good health. But given the fact that expansion is not taking place to the desired extent and investment is far below expectations, there can be no doubt that economic revival, if at all, will take longer than expected.
Meanwhile, there are reports that banks are sitting with a huge loan fund kitty which is indeed difficult to disburse. The Finance Minister has committed a large infusion of fresh capital into the banking system, which is borrowed from the Reserve Bank of India.
Insofar as concessions to business houses in bringing down corporate tax is concerned, the questions remains how will this be compensated? Will the government go for expenditure cuts? It must be ensured that the burden must not indirectly fall on the masses. Thus, it is certain that the government will overshoot the fiscal deficit targets with former governor of RBI pegging it closer to 4 per cent, cautioning that this deficit cannot be overlooked and every effort has to be made to adhere to the target of 3.5 per cent.
Obviously, the concessions will benefit a certain segment of the population – which indeed is very small – and one cannot expect any effect on the masses. However, it remains to be seen whether the increased profitability of the business class will be channelised for fresh investment. The question whether investment will increase is doubtful too and economists are sceptical about this, at least in the current fiscal though limited success may be achieved. Investment is usually a function of capacity utilisation and that is still stuck around 75 per cent for the manufacturing sector.
A recent report by Edelweiss found that tax cuts could boost GDP growth by 0.4 to 0.7 percentage points as corporate profitability increases. “With the government aiming to pay two instalments of PM-KISAN by September — releasing Rs 30,000 crore of pending dues and Rs 5000 crore of pending MSME returns — spending is expected to be significantly higher”, the report stated. Whether this has been done, is also another question.
It is not intended to point out that GDP growth may not be up to desired levels and will obviously be lower, say at around 6 per cent, but actually will be 2 per cent lower as rightly pointed out by Dr. Arvind Subramanian. As is generally agreed, the methodology the government uses is opaque, even arbitrary and faulty, and cannot be independently verified. If despite this, GDP growth rate has dipped recently, this is a cause for alarm.
It is necessary to refer here to the setting up an inter-ministerial task force (on September 7) to identify infrastructure projects and be included in the Rs 100-trillion plan for the sector in the next five year which, no doubt is a significant decision. The Finance Ministry said the task force will draw up a plan for the ‘national infrastructure pipeline’ from 2019-20 and 2024-25. The challenge is to step up annual infrastructure investment so that lack of infrastructure does not hold back the Indian economy and, in turn, generate jobs at all levels.
Creation of jobs is indeed a difficult proposition given the inexorable march of automation and the disruption in the labour market. Jobs becoming obsolete are expected to surpass the new jobs that would be created. The latter will be only for people with high cognitive skills and analytical abilities.
Then there is the rural distress, which is another area of concern, whether it is of the farm sector or other areas. Reviving the rural economy is critical at this juncture for only then can self-employment be generated and migration to urban centres be controlled. There is need for setting up institutions of higher learning in each sub-division or even at the block levels so that the rural folk can get access to better and diverse areas of education, which has a direct connection with employment, whether in industrial units or in farm-related activities. The emphasis on entrepreneurship has been a right step taken by the government and this has to be encouraged by making available bank loans and other necessities.
In addition to the measures being taken, it is necessary to reduce expenditure not on development projects but in the realm of administration, both of the Central and State governments. In this connection, the merger of banks can be considered a welcome step and may yield dividends after a year or so.
However, the entire scenario as of now is not at all encouraging and even optimists believe that it would be quite some months to see the results, i.e. positive indicators. Thus, the much touted claim of the nation reaching the $5-trillion mark may just seem political gimmickry with no sound economic logic. The government will have to move cautiously and judiciously with better governance and efficient management, right from Delhi to the panchayat levels, to ensure success of its plans.— INFA