It’s time to address demand-side problems

Madan Sabnavis | Updated on January 22, 2020

The government has over the last few months introduced various measures to address the slowdown in the economy by addressing specific issues in the auto, real estate, banking and SME sectors.

However, these are supply side measures which will work over a period of time and not immediately as there is, at present, a demand side problem in the economy. Most industries are operating with surplus capacity which can average around 30 per cent.

The IIP growth in consumer and capital goods has been negative which means that there is less consumption taking place which has impacted investment. The expected festival demand did not materialise despite a good monsoon. Therefore, one would be looking at a direct stimulus from the Budget this time.

Lower corporate tax

The government has already lowered the corporate tax rate in September, and several companies have made use of this new regime. However, the gains in profit have been used more for repaying debt or will probably be used to pay higher dividend this year.

The gains will not be invested unless there are signs of demand reviving. This is the problem with tax cuts (including income tax) which releases government revenue but cannot ensure that the money is spent in the desired manner. Something more direct is called for.

Here the expectation is that the government will go flexible on the FRBM targets and relax the fiscal deficit by 0.5-1 per cent of GDP which will translate under ceteris paribas conditions to between ₹55,000 and ₹1.1 lakh crore. This is a direct stimulus, which, if spent from April onwards will build a virtuous cycle for the economy.

Assuming this is spent for roads, railways and urban development, one can see strong backward linkages with sectors like steel, cement and machinery which will not just see an increase in demand but also lead to job creation which, in turn, will help boost the growth process.

Need to spend

Something in this direction is called for which will be direct as the private sector would still not be willing to come in a big way with the overhang of the NPAs casting a shadow on the system. The government is the only entity which is in a position to spend and is able to borrow at a lower cost and also absorb surplus liquidity with the banking system. Ideally a similar compromise in State budgets of 0.5 per cent of GSDP will hasten the process.

The writer is Chief Economist, CARE Ratings

Published on January 22, 2020

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