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View: Government’s booster package welcome but does not go far enough

Scrapping the tax on foreign portfolio investors announced in the budget drove a lot of them out of India.

, ET Bureau|
Updated: Aug 23, 2019, 11.42 PM IST
High-net-worth Indians will continue to chafe at the extra tax burden they have to suffer on incomes other than capital gains.
After Drona was killed, believing Yudhishthira’s half lie on Aswathhama, the name of Drona’s son and of an elephant, being dead, Yudhishthira’s chariot started to roll on the ground, instead of floating a few moral inches above it. After a flood of bad news on the economy, the present government has also got off its high horse and started feeling the ground reality. It now accepts that the economy needs a little more something right now than its claimed release from structural rigidities, through measures such as enacting the Goods and Services Tax and the Insolvency and Bankruptcy Code. That the finance minister is willing to listen to industry, instead of assuming that all knowledge of what is wrong and what needs to be done is contained in her Bahi Khata, will itself boost the headcount in India’s thinning thicket of animal spirits.

Scrapping the tax on foreign portfolio investors announced in the budget, which drove a lot of them out of India, is the most tangible measure announced Friday evening. But high-net-worth Indians will continue to chafe at the extra tax burden they have to suffer on incomes other than capital gains.

Advancing the budget measure of recapitalising banks to the extent of Rs 70,000 core is a welcome step. Even more welcome is the announcement that bankers will no longer have to worry about sleuths of the CBI and the Enforcement Directorate coming calling after every banking decision. Presumed innocent till proven guilty is, indeed, the right approach even with regard to bankers, viewed by increasingly large sections of the populace as a criminal underclass. Both these measures would help resume lending, if there is demand.

Demand has to be created. The sops for the auto sector will probably give it a breather, but is unlikely to cause a big enough impact to revive demand in steel, engineering and related sectors. For that, investment in general has to pick up. Capacity utilisation in manufacturing is well below 80%. Investment in adding industrial capacity has to await clear signs of future demand. That leaves infrastructure.

The proposal to channel bank funds to NBFCs and refinance housing finance companies will help at the margin. But the government needs to come up with new public private partnership projects in infrastructure and more details of the promised Rs 100 lakh crore funding of infrastructure. We also need more projects, complete with land acquisition visibility and environmental clearance, for investment to revive demand in general. Completion of the long-pending Delhi-Mumbai Industrial Corridor project, with a dozen odd new towns to be built across several states, suggests itself as an ideal candidate, although it dates back to the dark ages of UPA rule, when, according to the current ruling theology, nothing stirred except for corruption.

India’s elusive bond market gets a boost, at least in terms of official recognition. The onshoring of rupee derivatives trading, credit guarantee for pooled assets of non-banking finance companies and credit enhancement for infrastructure and housing projects will help the bond market, as will better insurance against default, offered by better credit default swaps. However, if all available household financial savings are pre-empted by the public sector, bond market depth would be at the mercy of foreign portfolio investors and the vagaries of extra-accommodative monetary policies in the US, Europe and Japan.

Getting banks to link their lending rates to the repo rate is less attractive than it sounds. Different banks have different cost structures, different provisioning requirements and different lending opportunities and customer loyalties. The right thing to do is to encourage competition, including from new fintech companies, among lenders to lower lending rates, instead of micromanaging of interest rate setting by banks.

The finance minister did not mention exports in particular, but faster GST refunds would help exporters and micro, small and medium enterprises (MSMEs) in general. As would easier discounting of their receivables on an electronic platform. The government’s promise to release payments to companies that have done work for it is welcome. Yes, we have to be grateful for getting paid for the work we do. However, exempting cases locked up in litigation from this generosity would rule out most past dues. The way around that is to extend to past cases that have gone into litigation after arbitration, the new policy of paying 75% of an arbitration award immediately, even if the award is challenged by the government in the high court later.
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