The Economic Times
12,248.2567.9
Stock Analysis, IPO, Mutual Funds, Bonds & More

The next booster shot to revive economy may not be far away

Going by what the indicators are showing so far, third quarter doesn't hold any hopes of revival.

, ET Online|
Updated: Dec 09, 2019, 07.09 PM IST
0Comments
Agencies
Economic growth
Tax growth has remained muted so far this fiscal on account of slower economic growth and corporate tax sops.
The Reserve Bank of India, in its December monetary policy review, revised annual economic growth estimate down to just 5 per cent from 6.1 per cent predicted in the October policy. This comes close on the heels of GDP growth clocking just 4.5 per cent in the second quarter.

Going by what the indicators are showing so far, third quarter doesn't hold any hopes of revival. A big alarm has already gone off — core sector growth declined further to (-)5.8 per cent for the month of October from (-)5.2 per cent in September. Vehicle sales, one of the most important markers, saw a slight uptick in October only to be followed by weak numbers in the very next month. Other indicators also appear far from encouraging. Manufacturing PMI dropped to 50.6 in October from 51.4 in September.

In the middle of the second quarter, the government had announced a set of reforms with a view to boosting credit growth and ramping up investments. Many economists were quick to pick holes in those measures. They argued that measures like cutting corporate tax would act as supply side stimulus while the Indian economy is currently facing hiccups on the demand side, as shown by dwindling private final consumption expenditure which grew at just 5 per cent in the second quarter, slightly better than the first quarter but below the 9.8 per cent growth clocked in the second quarter of last year.

Budget Crystal Gazing
RBI Governor Shaktikanta Das signalled that the upcoming budget may come up with some counter-cyclical measures to boost the economy. The rate-setting Monetary Policy Committee unanimously decided to pause and wait for signals from the Budget which will be announced in the first week of February before the RBI's next policy review. Along with stimulus measures, the RBI will also keep an eye on the state of the fiscal deficit which at present looks all set to breach the 3.3 per cent target for the current year.

Direct Tax Rejig
Much has been written about a relief for consumers in the upcoming Budget by way of a tweak in tax slabs. The objective is to put more money in the hands of the consumer.

According to some reports, the draft of the direct tax code submitted by the Akhilesh Ranjan Committee to the finance minister in August talks about relief to the taxpayers. The contents of the report, however, have not been released yet.

A Mint report had said that the government may include some of the suggested measures in the existing Income Tax Act, instead of completely replacing it with a new code at a time when the economy is experiencing stress.

Higher take-home pay
As reported by ET, the government wants the take-home component of your salary to go up by making the 12 per cent contribution towards EPF flexible. Quoting Labour ministry officials, the report says that the Social Security Code Bill contains provisions that allow employees to reduce their contribution towards the EPF below the 12 per cent mark, thereby ensuring a higher take home salary.

The goal is to increase disposable incomes so that consumers can spend more at a time when the sale of durables and to some extent even non-durables has seen a downtick.

Tepid GST collections
Tax growth has remained muted so far this fiscal on account of slower economic growth and corporate tax sops. States have shown concern over delay in GST compensation for the August-September period as the consumption tax is all set to miss the collection target for this fiscal.

Reports have hinted that the upcoming GST Council meeting on December 18 may take some steps towards restructuring the slabs with the aim of boosting the GST kitty. The November collections comes as a breather for the government as it crossed the psychological Rs one lakh crore mark after three months of subdued mop-up.

Propensity to save more?
Another reason that the move to put more money in the hands of the consumer to spur demand may backfire is the fact that consumers tend to save more during times of uncertainty. Amid incomes flatlining and the job crisis lingering, consumers may not feel too upbeat about spending more even if disposable incomes were to rise.

As the RBI awaits the full impact of its 135-bps rate cut to play out through transmission by banks, there is a likelihood that the government may go for fresh stimulus in the Budget ignoring the fiscal deficit target for the time being. But in light of what finance minister Sitharaman had said — that she was duty bound to stick to the fiscal glide path under the FRBM Act — it could turn out to be a very tough balancing act for her.
Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links


Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service