Economic Highlights

New Delhi, 17 July 2017

Economy Blues

END I-T, BOOST GROWTH

By Shivaji Sarkar

Major concerns shadow the Indian economy. The Central Statics Organisation figures speak of both low inflation and industrial growth. The RBI is skeptical and is keen on maintaining, if not raising interest rates. And, the International Monetary Fund (IMF) says the economy may slow down.

The RBI’s June data on loan off take from 41 scheduled commercial banks states that non-bank food credit increased by 4.5 per cent in April 2017 as compared with an increase of 8.4 per cent in April 2016. Credit to agriculture and allied services increased by 7.4 per cent against 1.3 per cent a year back. The credit to industry contracted 1.4 per cent in comparison with a token increase of 0.1 per cent in April 2016. The demand for credit in almost all the major sectors – infrastructure, food processing, metal, metal products and textiles slumped.

Further, the services sector also availed less credit. Till April, 2017, it increased by 4.1 per cent against 10.9 per cent a year back. This is a clear indication of the impact not only of the domestic market but also the global situation post hardening postures of US President Donald Trump.

The credit demand rise was witnessed in petroleum, coal products, nuclear fuels, rubber, plastic products, vehicles and gems and jewellery. The trend denotes reduced activities in all major sectors. In fact, the investment in gems and jewellery is an indication that many people are turning their money into gold-related assets marking a sense of uncertainty among the slightly affluent. This trend possibly reflects that money is moving away from banks, owing to interest rate uncertainties.

Undeniably, the way the banks are cutting interest rates on deposits has caused concern among large number of depositors, including senior citizens, women and marginal earners. Their savings are getting eroded on two counts – cut in interest rates as also income tax on savings, obviously suppressing demand. This kind of situation leads to a mindset that drives people away from the market. They may be having the purchasing power but prefer to save rather than spend.

The state of affairs calls for a drastic change in approach to entice people to the market. Even some of the large retail chains recently closed down their units in many parts of the country as the demand slump led to fewer footfalls. Clearly, the market needs to be unbundled and so also the purse strings. It is indeed surprising that the Seventh Pay Commission hike for government employees has not seen the kind of demand rise that was expected.

At such a time of global uncertainty, reducing interest rates is not going to help. The severe income-tax on savings’ interests is making things more difficult. The push for raising more taxes is draining out the small coffers of the common man, who are said to really drive the economy. Interest rate cuts help some of the big industries, who sit on their huge reserves of trillions, and drain out the banks that thrive on the common man’s deposits. There is need also to look at how the rise of GST on credit cards is affecting their use or not.

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As is well known, the change in market activity has its impact on jobs too. On the one hand, the government says it cannot function as the sole employer and on the other the industry is not coming to its rescue by employing people. This calls for introspection at the earliest. While the Modi government has pushed several programmes to catalyse employment opportunities including the ‘Make in India’, ‘Skill India’, ‘Mudra’, these initiatives are so far unable to provide enough jobs for the millions of young Indians joining the workforce every year. Statistics show that 1.55 lakh jobs were created in 2015 and 2.31 lakh in 2016. The last major job growth was of 10 lakh jobs in 2009.

Worse, seven big IT firms, including Infosys, Wipro and Cognizant, are planning to lay off 56,000 engineers. Earlier this year, global advisory firm McKinsey & Company cautioned that nearly half of the workforce in the IT sector would be redundant in the next three years. This is not only due to the Trump effect but has to do with the growth trend in the domestic industry.

A look at the real estate sector too shows dismay. Till some time back it was said to be the largest employer even for marginally skilled and unskilled persons. But now it is suffering from distrust, malfunction and large undelivered inventories.

Indian statistics has never been questioned. For the first time, the IMF says that the National (Indian) Accounts Statistics would have understated the economic impact in near term in its May 2017 regional economic outlook for Asia and the Pacific. It notes: “Growth is revised downward in India due to temporary effects from currency exchange initiative and in Korea owing to political uncertainty”.

The present problem of Chief Economic Advisor Arvind Subramaniam harping on low inflation and the RBI’s tough monetary instance is better avoided. The RBI’s cautious approach, since the 2007-8 US sub-prime crisis proved that it has saved the country from worsening of the situations. The financial sector regulator has to function with wisdom and caution. Despite that it could not stop the profligacy of the banks that has led to web of NPAs. The RBI at least cannot be blamed for the slowdown of the Indian economy.

However, the situation calls for a hard relook at the entire economy. The government has its concern for political delivery but for that it should not lower its guard. It needs to look at income tax too, which many now call ‘impoverishing tax’. While the GST is being projected as revolutionary, the provisions of income-tax are depriving the middle class as they are unable to meet even their normal demands. Adding to the demand with losing almost four months of income in a year is not possible.

Therefore, there is need for drastic reduction or even elimination of I-T to give the demand a boost. Much of the demand crunch is due to the heavy taxation on low or at least not so high average income of Indians. When they have earnings they are taxed and when none, nobody helps them. In essence, the policy challenge is not very different from what many advanced economies are facing.

At a time of global protectionism, the government has to act out of the box, which it tries to do at times. But it has to study the linkages between taxing people and growth. It should allow people to blossom with less restriction and possibly zero income tax. This will not only be politically paying but expectations are that it would boost the economy. Time to give it a shot.--- INFA

(Copyright, India News & Feature Alliance)