India can’t spend its way out of the current economic mess, made worse by the pandemic. That however, doesn’t mean nothing can be done. There are at least eight things that Modi government can still do and that won’t require much money, just a genuine political intent.
Faced with its worst economic crisis in decades prompted by the corona outbreak, India’s GDP growth is likely to shrink by 5% in FY 2020-21, according to Goldman Sachs. That will lower tax collection, and cap government’s ability to spend and support growth. No wonder, despite strong pressure from India Inc for large fiscal stimulus, Modi government has primarily relied on loan guarantees and liquidity support as there is little room to relax fiscal deficit target without inviting ratings downgrade. ..
First, doles for the poor will certainly help but there is a limit to how much the government can afford to spend. Thus, our best bet would be to support SMEs as debt-laden large companies would be more interested in paring down debts, postponing capex and cutting jobs to protect their margins and avoid punishment by stock markets.
As of now, in addition to cash flow issues, small businesses are troubled by increasing compliance burden involving multiple filings, licensing and reporting requirements, especially those related to GST. If there is a political will, the government can substantially reduce regulatory cholesterol that hampers the prospects of small businesses.
Why should a micro enterprise, with two to three employees, need to file monthly, quarterly and yearly GST returns in addition to several others such as TDS and income tax returns? Cutting these requirements to a bare minimum will not cost any money, and it will free up a substantial part of government machinery that can be put to better use. Small exporters, most of whom survive on as low as 3-4% operating margins, are shamelessly being exploited by banks that extract as much as 2-3% of export earnings as currency conversion charges. Making RBI’s retail forex trading platform (opposed by commercial banks) work effectively and allowing the likes of TransferWise can stop this exploitation.
Second, the government should focus on helping industries that have strong backward and forward linkages with multiple industries such as automobile and real estate, and not the processors of globally over-supplied commodities such as aluminium and steel. The country’s automobile industry was already struggling due to excessive regulatory rent seeking and a rush to adopt tighter emission norms. Corona-induced disruptions will further dampen its prospects, and in turn those of thousands of component suppliers.
Thus, the government could consider relaxing the implementation of BS-VI emission norms for a year in non-metropolitan areas. It will support struggling automobile manufacturers, component suppliers and dealers employing millions of workers, without any monetary or fiscal stimulus.Moreover ,automobile demand is highly elastic so cutting GST on vehicles will increase their sales without adversely impacting tax collections. So it’s worth a try, not only for vehicles but other discretionary goods and services in the top GST brackets.
Third, helping real estate will help dependent industries starting from cement, steel, electrical appliances to interior decoration. Thus, substantially reducing circle rates, stamp duty and registration charges, and helping complete incomplete projects by government taking them over and selling land parcels of defaulting builders make sense. The overall tax revenue gains will fully compensate for the loss from cutting stamp duties and registration charges Fourth, remove all restrictions on e-commerce, even if a trader’s body like CAIT thinks that Amazon and Flipkart will devour its members but Big Bazaar, DMart and JioMart won’t. E-commerce will help keep the growth engine running by supporting all kinds of manufacturers and yet ensure social distancing needed to fight corona.
Fifth, address our huge policy distortion pile up on urgent basis. Thus, the government should put an end to price cap in medicines and medical devices barring a small list of essential medicines. Price cap has failed to make masks and sanitisers cheaper and it hasn’t brought the overall cost of knee and cardiac surgeries down.
The government should also junk the practice of imposing different import duties on different categories of fibres to ensure a fibre neutral regime. That will give a big push to textile industry.
Sixth, it’s time New Delhi got serious about ensuring a predictable business environment. Unpredictable rules with respect to investment, trade and taxes, and difficulties in enforcing contracts continue to deter existing and potential investors. Similarly, an impartial regulatory regime that doesn’t discriminate between domestic and foreign investors will be helpful at a time we’re trying to lure away top global manufacturers to India from China.
Seventh, better to reverse corporate tax cuts temporarily that haven’t led to any big bang investment. Instead, cut personal income tax. Improvement in purchasing power of the poor is no doubt helpful, but it will mostly support demand for essentials such as food and clothing.
Thatis needed, but not enough. It’s the relatively affluent households who drive consumer demand for high value discretionary items such as consumer durables, education, health and recreation services, and homes.
Unless, they get relief on direct and indirect taxes they have to pay on their consumption, it will continue to cap households’ demand and in turn the country’s GDP growth rate.
Eight, between raising import duties and letting rupee weaken, we should opt for the latter. Let us welcome 80 rupees to a dollar. That will check unnecessary imports, support indigenous manufacturing, and yet will encourage exports.
