The Finance Minister’s announcement of a stimulus package harbours well for the economy that has seen a sustained slowdown. Measures to revive growth come at a time when the world economy at large is buffeted by global headwinds and trade slowdown. All of these does indeed impart some sort of stability and underpins a new growth impetus for India.
Following the persistent slowdown, there have been widespread demands of a fiscal stimulus package from various quarters since Sitharaman’s budget to spur growth. But given the precarious fiscal situation, as many economists have warned, it had left the FM very little room to offer a package without breaching the fiscal deficit target. However the FM’s announcement made it evident that she has sought to revive the “animal spirits”, a term initially coined by John Maynard Keynes and found several references in the economy. On top of it she has also tried to unclog the liquidity blockages to ensure smoothening of credit flows and has tried to incentivise demand in certain sectors, without the new measures having any broadscale impact on the country’s finances.
Decoding some of the moves
The Budget proposal to hike surcharge on Foreign Portfolio Investors (FPIs) had spooked foreign investors, which was supposed to impact 40% of the FPIs as per industry estimates. Nonetheless, the present decision to rollback this enhanced surge is indeed a welcome concession, as the massive capital outflows that stemmed because of this decision could be reversed and instead, aid in the rupee’s appreciation.
The withdrawal of the surcharge on FPIs would boost a sagging market. However, a sustained rally on the market is only expected when there is a visibility of good earnings growth and a reversal of the slowdown in the economy.
Other steps such as infusion of INR 70,000 crore as capital in state-run banks, to smoothen credit flow that will benefit corporate, retail and market segments is another credible move. However, past instances of capital infusion simply have not proven sufficient and addressed banking issues that has prolonged the country’s economic recovery. An example of this is that while the RBI has announced successive rate cuts, it has not simply got transmitted to bank’s lending rates, whereby hitting both the supply and cost of credit. India’s banking industry dominated by PSUs will be competitive, more efficient and profitable only if there is a structural design change, featuring operational interdependence, empowered bank boards, better governance standards and improvement in quality of lending.
Meanwhile, withdrawal of the draconian angel tax that tightened the noose around startups dependent on angel investors is a welcome move. For instance, any startup that has registered itself with the Department for Promotion of Industry and Internal Trade (DPIIT) and has completed all the required valuations would not be bothered by tax authorities. This waiver of the angel tax that would subsequently simplify the flow of risk capital for young startups generally spellswell for a thriving ecosystem. But this response to “tax terrorism,” which had somewhat put a dent on the government’s conduct acts as a post-dated cheque. For a tax that has been in operation for seven years and has been responsible for snuffing out nascent startups, its removal should have occurred earlier.
Crucially, the automobile sector that has experienced a lackluster growth for a considerable time has also been accorded some attention. An increase in one-time registration fee has been deferred, a depreciation benefit on vehicles has been doubled, a ban on the purchase of vehicles by government departments has been lifted and a renewed emphasis has been laid on helping a supply chain emerge for the local manufacture of electric vehicles. All of these measures help with both the inventory buildup and creating a new market for e-vehicles, but car manufacturers are unlikely to ramp up production until they see a sustainable return to normal volumes.
On the whole, Sitharaman’s stimulus package should rein in investor sentiment and create confidence within the market. This in itself could power the growth engine such as India’s long-languishing investment rate. However, what is needed is to sustain the growth and this could only start with driving up consumption levels which implies more money in the hands of people.
India Outbound
September 30, 2019
source https://indiaoutbound.org/what-does-the-fms-stimulus-package-indicate/
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