Photo: Mint
Photo: Mint

Opinion | India can do more to put its economy on a firm footing

The budget and RBI’s measures should help but we need a bolder stimulus to push up the growth rate

The Indian economy needs some introspection in the light of two big events. First, the budget, and second, the Reserve Bank of India’s (RBI’s) monetary policy review. Their dual stimulus is expected to support the broader economy, although steps to overcome some immediate challenges still are needed.

Let us begin with RBI’s policy review. To say that the apex bank surprised everyone with its out-of-the-box and somewhat unconventional announcement would be an understatement, which is the reason many in industry turned to experts to decipher its full impact.

The central bank chose to borrow an idea from the European Central Bank to announce long-term repo operations. As part of the move, it will pump in 1 trillion through liquidity auctions of one- and three-year tenor starting this month. This will help pull down interest rates, and have a cascading effect on spurring credit growth. RBI also exempted banks of the mandatory requirement to set aside cash equivalent to 4% of deposits to the extent it extends new loans for automobiles, residential housing and advances to micro, small and medium enterprises till 31 December 2020. An extension of the date of commencement of commercial operations by a year also came as a welcome breather for the real estate sector, with the fear of the asset classification of project loans getting downgraded no longer breathing down their necks.

The budget for 2020-21 stayed away from gimmicky short-term boosters to propel the economy, while staying fiscally prudent. It was argued that the economic downturn faced by the country was driven as much by a demand slowdown as by global factors. So, most people viewed this budget as aimed at driving consumption. An increase in the rural sector credit target to 15 trillion, an allocation of 69,000 crore for healthcare, and the simplification of the income tax regime coupled with lower tax rates should leave more money in the hands of the people. India’s consumption story tends to weather economic volatility better, and the finance minister seems to be banking on it to drive an economic revival.

According to the finance ministry, the government had data of around 57.6 million taxpayers who filed returns in 2018-19. It expects around 69% of them will find it advantageous to switch to the new tax structure, under which monetary benefits of up to 74,000 could be availed. Overall, this may put around 40,000 crore in the hands of consumers. The government, however, also needs to think about expanding the tax base.

The budget’s focus on infrastructure development for sustainable growth could also provide a much-needed stimulus. The 1.7 trillion allocated for the purpose will be mostly spent on transport infrastructure. In addition, the commitment to spend 103 trillion under the National Infrastructure Pipeline should help drive demand in India’s core sectors and create opportunities for employment, besides attracting foreign direct investment (FDI).

The disinvestment programme forms the backbone of the government’s capital expenditure plans, although the 2.11 trillion revenue aim set for 2020-21 looks ambitious. The overall aim should be to ensure macro-economic stability.

The announcement of a one-time amnesty for tax evaders may help shore up government coffers. Estimates suggest that the sums under litigation are in the league of 8 trillion. Even if the government lays its hands on half that sum, the country’s fiscal burden will substantially ease.

In post-budget discussions, finance minister Nirmala Sitharaman has made references to various “green shoots" in the economy to instil confidence in a revival. If we look at the data on hand, then the scenario is something like this. Going by data from the Department for Promotion of Industry and Internal Trade, FDI inflows have jumped 15% year-on-year to $26.1 billion in the first half of this fiscal year. Foreign exchange reserves have increased to $466.69 billion as of January, from $413 billion at the end of 2018-19.

Apart from all this, the finance minister has offered various indicators to substantiate her expectations of a revival, like a rise in goods and services tax collections, and positive industrial output numbers. While replying to the budget debate in the Lok Sabha, the finance minister said that the government is focused on such drivers of the economy as public and private consumption, exports and private investment.

On the global front, an easing of oil prices as well as China’s plan to slash tariffs on some US imports will defuse trade tensions, which would be positive for India as well.

But for India to reach the $5 trillion economy goal, a bolder fiscal stimulus to put growth on a higher trajectory is needed. As it has rightly been said, every challenge is a gateway to an opportunity. India could be a preferred destination for global companies to invest and increase market penetration.

What the country must do is make the most of its demographic dividend through an emphasis on reskilling and skill-creating educational programmes.

In all, the future of the nation would look more promising once it is clear that the economy is headed higher. Till then, one must focus on conquering the immediate challenges that lie ahead, and overcome hurdles along the way towards the country’s target of becoming a global leader.

Niranjan Hiranandani is president, ASSOCHAM

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