Economic Highlights
New Delhi, 2 September 2019
RBI
Intervention
WINDFALLS
DON’T MAKE ECONOMY
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
(Copyright, India News & Feature Alliance)
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