The Centre must repair the stalling economy fast

| Updated on January 08, 2020 Published on January 08, 2020

So far, the focus has been on restarting investments. Now, demand-side measures have become imperative. The time appears ripe to slash personal income tax rates across-the-board

The Central Statistics Office’s first advance estimates suggesting that India’s real GDP growth is likely to dip to a decadal low of 5 per cent in FY20 is not particularly shocking, given that the first half of the year has already gone by with a growth rate of just 4.8 per cent. Even getting to this 5 per cent estimate entails some optimistic assumptions. In arriving at this number, the CSO has budgeted for a sharp bounce-back in private final consumption expenditure (PFCE) from 4.1 per cent in the first half to 7.5 per cent in the second half. Otherwise, it forecasts a slippage in gross fixed capital formation (GFCF) from 2.5 per cent growth in the first half to a 0.6 per cent decline and a slowing pace of government spending from 12.3 per cent to 8.7 per cent. Even more worrying is the estimated nominal GDP growth rate of 7.5 per cent for FY20 — the lowest in four decades. A collapse in the nominal GDP growth can send the economy tumbling down a rabbit hole. Low income growth inevitably triggers consumption cutbacks, weak corporate toplines dent investments and low tax collections curb the Government’s ability to stimulate the economy through spending. These numbers warn that the window of opportunity for the Centre to effect repairs to the stalling economy is fast closing, even as the honeymoon period of low oil prices seems to be ending.

So far, the Centre’s economic interventions have focussed mainly on restarting investments. Sharp cuts in corporate tax rates were aimed at kick-starting the private capex cycle and the recently announced National Infrastructure Pipeline attempts more of the same. But with private capex revival contingent on a turnaround in consumption, demand-side measures have now become imperative. The time appears ripe to implement the Direct Taxes Code, by slashing personal income tax rates across-the-board while untangling the complex web of exemptions, in the upcoming Budget. Unfreezing credit markets holds the key to getting India Inc in job-creation mode. Here, the Centre needs to prevail upon bankers to abandon the safety of SLR securities and to resume their core banking function of working capital and industrial lending. On its own spending, the Centre needs to stop trying to stick to unrealistic deficit targets through ill-timed spending cuts and tax terrorism. It must instead focus on presenting more credible budget numbers and initiate deep-rooted expenditure reforms for the medium term.

While such measures will help to some extent, the NDA regime must also recognise the wanton damage it is wreaking on the economy by constantly stirring the pot with its brand of polarising politics. Consumer sentiment and business confidence are not divorced from the mood of civil society. The ongoing cross-country protests against the Citizenship Amendment Act, frequent Internet shut-downs and crack-downs against students do much to rob India of two big contributors to its much-vaunted TINA factor — its democratic credentials and political stability.

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Published on January 08, 2020
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