Are Nirmala Sitharaman’s announcements good enough to reverse a slowing growth?
If a fiscal stimulus is off the table, FinMin has to keep tweaking rules to make things easier for businesses.
Sitharaman’s choice of words, body language and seemingly ardent promises to do more in order to keep alive the hope of businessmen and traders in dealing rooms is a testimony of a government that is slowly beginning to sense that the road to the making of ‘New India’ will have twists, turns & occasional bumps.
It’s somewhat even reassuring to see that the Narendra Modi government is willing to accept that the slowdown is not just another story spun by social media spin-meisters and vocal lobbies — and that the gathering cloud over the job market would simply blow over with the advent of the festival season. Now, we are left to ponder over the weekend the single-most important question pertaining to the Indian economy: are Friday’s announcements good enough to reverse a slowing growth?
Sitharaman has kicked off what appears to be her first tranche of growth-boosting steps with administrative measures, correcting announcements, such as higher surcharge on foreign portfolio investments (FPI), which were made unwittingly, and by targeting a few apparently low-hanging fruits. But not tax cuts.
The steps she announced may not cost much, and some of which were a reiteration of measures already passed in the July Budget.
The finance minister, her team members, as well as other government functionaries have made it abundantly clear in the past 48 hours that they will stick to fiscal prudence. Even on Friday, she reminded us that India’s growth rate continues to be impressive compared to most countries.
This is a government that will never like to see a day when the economy under its watch suffers fiscal slippage. One can, therefore, assume that chances of tax cuts & the so-called ‘fiscal stimulus’ are unlikely, unless there is a dramatic slowdown in growth.
From Groan to Grown
Growth has already fallen to 5.8% in the first quarter of 2019, from more than 8% a year ago — a dip that should worry policymakers as well as businesses. Among other things, the government hopes to arrest the slowdown in economic activity with prompt payment to vendors, release of goods and services tax (GST) refund, purchase of vehicles, and encouraging corporates to buy more automobiles by raising the rate of depreciation.
The measures follow a few days after Reserve Bank of India (RBI) governor Shaktikanta Das said that no large non-banking financial company (NBFC) will be allowed to fail. By nudging State-owned banks to buy portfolios of cash-starved NBFCs (against a partial guarantee), the government may help in calming the nerves of a large shadow banking industry that has been a source of panic and market volatility.
All these are positive steps, and ideally should not have waited till now. These are certainly necessary measures. Over the next few months, we will find out whether they are sufficient.
What will influence Sitharaman’s next set of announcements?
It is not possible to measure slowdown in the course of a week or a fortnight. Will it be stock prices? A rally — rather, how strong or sustainable it appears — when the market opens on Monday? Feedback from the industry and foreign portfolio managers?
If a fiscal stimulus is off the table — at least for the time being — the finance ministry has to keep on tweaking the rules, sector after sector, to make things easier for businesses.
However, if the basic problem plaguing the economy is a sharp drop in demand, will regulatory changes alone save the day? Will it make analysts revise the earnings forecasts of large companies that sway the stock indices?
Act 2, Part 2
That calls for a Plan B, which the finance minister and her team may have to keep ready. Instead of completely ruling out all forms of fiscal easing, they should, perhaps, have the flexibility to initiate a quiet chat on how to go about if the growth continues to slack and they are forced to offer tax sops.
It’s not an easy debate with revenue collection continuing to be a challenge, and even admirers of the government criticising the brazen style of tax officials. Nonetheless, it may be worthwhile in avoiding nasty surprises and embarrassment.