It requires a mix of short and long-term measures for demand to pick up and the ailing economy to recover
India needs to look at its falling demand, rising power, fuel and banking charges, high tax and toll rates. It is an induced inflation, whatever the indices might say, amid a perceptible economic slowdown. The nation forgets that commodity prices are increasing, incomes are falling and atrocious banking policies and transport tariff are aggravating the situation. The rising power charges in States like Uttar Pradesh are spiking up prices and slowing down crucial sectors, even agriculture. The non-banking financial companies (NBFCs), key lenders to Micro, Small and Medium Enterprises (MSMEs), are in a crunch owing to massive loan defaults by road toll collectors of IL&FS. Officially it lost Rs 91,000 crore in 2018. Though it is not widely discussed, it has severely affected many micro-financing institutions. The PMC bank’s virtual closure has exposed the cooperative sector as well and the modus operandi is almost similar to that of IL&FS. The latest Asian Development Bank assessment further brings down the Gross Domestic Product (GDP) growth rate to 6.5 per cent against the official estimates of 7 per cent. In the last quarter, it touched 5 per cent, the lowest in six years.
Prime Minister Narendra Modi is trying hard to lure foreign investment but it is taking time to get translated on the ground. Even the country’s rich are hit, according to Hurun India Rich List 2019. Their cumulative wealth dropped by Rs 3,72,800 crore. It says 344 individuals or almost a third, witnessed wealth reduction and another 112 could not meet the cut-off of Rs 1,000 crore, about half of last year. It finds India’s richest man Ambani’s asset value rising by three per cent and the upcoming Adani’s by 33 per cent, while Shanghvi of Sun Pharmaceutical lost 20 per cent wealth and LN Mittal of Arcelor Mittal lost six per cent. Eight other super rich also saw a decline in their wealth. The list indicates tough competition among the rich and also that their industries have been hit by the economic slowdown. In short, the fiscal meltdown is all encompassing.
The Finance Minister, despite defending her policies, agreed to cut corporate tax rates from 35 per cent to 25 per cent. It is welcome but a bit too late. In fact, it is admission of a faux pas. With depreciation and other adjustments, the corporates for the last over two decades have not been paying more than 22.5 per cent in income tax. The supposed relief of Rs 1.45 lakh crore is mere numbers. Overall the Indian corporates had been paying 48.3 per cent taxes, according to the Organisation for Economic Co-operation and Development (OECD), including tax on dividends to shareholders, who also pay another tax on it. Indian corporates, despite the present cut, would pay over 38 per cent as taxes. They were paying 48.3 per cent now. The problem is individuals still have the highest rate of 42.5 per cent. With other indirect taxes, even after the Goods and Services Tax (GST), an individual pays over 70 per cent of their income as taxes. Could the economy do better with less than 30 per cent of earnings its citizens are left with?
Somewhere the country is unable to understand its economics. The Government expenditure increases and businesses gasp due to their inability to recover basic costs. Despite easing of norms, no man can dare do business unless he pleases law enforcers. This is despite efforts by Modi to root out graft. Citizens say Modi’s clampdown on corruption has only led to rise in rates as “risk for perpetrators” has grown.
Naturally the crisis continues. The latest Reserve Bank of India annual report 2018-19 confirms the difficult path the economy is on. The collapse of the automobile, textile and diamond industry, thaw in the information technology sector, rising Non-Performing Assets, tightening of banking charges and norms, the failing manufacturing sector and sluggish consumer demand lead to deceleration. There is a cash crunch. It is affecting the farm and wholesale sectors. Government rules of transacting through banks is also delaying deals and adding to the cash crunch. India does not learn from the US sub-prime crash of 2007-8. When we move through banks, the perceptible volume of loans increases but in reality it suffers as there is no cash quantification. The system needs cash lubrication, which in the wake of demonetisation, has dried up. The chief economist of Yes Bank, Shubhada Rao, recently said people need to have cash for the supply-side changes to yield benefits. She said that a spree of job losses and high unemployment has led to the fall in demand, a key reason for the slowdown.
It requires a mix of short and long-term measures for demand to pick up. The mix has to include easing of taxes as also a discussion with all stakeholders, including the Opposition and the common man. The NITI Aayog has to take the lead in generating new thoughts and formulate a people-oriented policy. The situation is difficult, but not impossible to handle. Deliberations and proper, not euphoric, publicity-oriented actions, may be the trajectory for growth.
(The writer is a senior journalist)