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Quick ways out of slowdown: 10 things government can do
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K Yatish Rajawat | 03 Sep, 2019
Growth has momentum and slowdown has inertia. The Indian GDP growth has
fallen to 5 per cent in the April-June quarter, from 8 per cent. This
slowdown can only be reversed if both short-term and long-term reforms
are undertaken.
The fall in GDP growth is sudden and
dramatic. Till now, while only businesses were talking about the
slowdown, it is now a reality for the country. People worry about how
bad things are and is this bottom or the beginning of a slowdown.
There
is concern about the speed and nature of the government and industry's
response, and will these actions turnaround things immediately, or not.
These
concerns and perceptions need answers as they affect consumer
confidence and consumption. Acknowledging the problem is not a sign of
weakness or acceptance of any blame. It's a fact that leadership in the
corporate sector has failed to recognize the major transition taking
place in their sector that has affected consumer demand.
Sectoral
collapse has happened because of poor business decisions in banking,
real estate, construction and lately in non-banking finance companies
(NBFCs)/housing finance companies (HFCs). Now all these sectors are
looking for stimulus packages to bail them out from their mistakes.
Take
the auto sector, for example. It did not prepare for shifts in consumer
behaviour and market needs. They contribute almost 6 per cent to the
GDP and offer employment to 37 million people and are clamouring for
stimulus on behalf of their employees.
The stimulus has to be
for both employees and corporates. The sector is asking stimulus to
protect jobs, but it does not mean it will happen as they move to
electric vehicles (EV).
EVs have a fraction of moving parts as
compared to an internal combustion engine. The engine and drive line are
two crucial components of the internal combustion engine that
contribute 50 per cent of the auto component industries' revenues. The
move to EV will disrupt the supply chain of components at one end and
maintenance and repair on the other. This needs specific incentives to
upskill employees to maintain, repair or make electric vehicles.
Upskilling
of mid-level workers is the core component of all sectoral stimulus
packages. The disruption in industries is not cyclical or because of
economic slowdown. There is a structural shift in many industries
because of technology or shift in consumer preferences. Automation is
affecting jobs in both manufacturing and services, which displacement is
also affecting the consumption cycle.
The stimulus for auto
companies has to promote investment. India needs an investment of $40
billion in batteries for EVs. Auto companies can get incentives for
making this investment. They can be incentives to shift existing
production lines to electric cars.
These are, however, palliative measures and will not turnaround the economy The bigger issue is revival of consumption demand.
The
government has had discussions with several sections of business and
economists over the last few weeks. It has plucked out all the prickly
issues which created a negative perception and eroded trust. But if a
tyre is losing air pressure removing nails from the road ahead will not
stop the air from leaking.
Action has to inspire confidence
among consumers to spend and for industry to invest. Removing taxation
on foreign portfolio investor and other prickly issues is a hygiene
factor. It shows the government is correcting mis-steps faster.
Addressing it within a week, which the Finance Minister Nirmala
Sitharaman did shows the speed of response.
This is important as
it will bring back the confidence in the industry, investors and
market. But the confidence to spend or even pay EMIs has to be restored.
It is equally important to set the right expectations for a
return to normalcy or a turnaround in growth. The massive mandate this
government received shows the expectation of the common man. Not setting
the expectation right or distorting the timelines will not serve to
inspire consumer confidence. People are pragmatic and patient if they
understand the time it will take to come out of the current situation.
They know there are no shortcuts out of slowdowns.
The current
initiatives are either short-term measures or long-term reforms. The
consolidation of Public Sector Banks (PSBs) announced on August 30,
falls into the latter category. It will not turnaround the banking
sector, ease the credit flow or even improve the transmission of
interest cuts -- the three most important problems contributing to the
slowdown. The consolidation will take time.
The consolidation of
the PSBs is a structural reform much needed, long overdue and may
reduce the recapitalisation requirements. The governance reforms will
improve the process of supervision, hiring and compensation. It will not
change the credit evaluation, disbursement and monitoring of loans,
which is the core problem in PSBs.
The culture of poor
evaluation of borrowers and lack of risk mitigation has contributed to
the non-performing asset (NPA) mess in the PSBs. This culture cannot
vanish overnight as it's entrenched in processes and behaviour.
Banking
leadership can use the disruption to overhaul the culture and build a
new system and processes. If they get sucked into the merger and take
their eyes off credit growth, customer retention, their merged entity
will be weaker than the sum of the parts.
Both merger and governance reforms were important but are obviously not sufficient from the slowdown point of view.
To
kick-start the consumption cycle money has to go into the common man's
pocket. This can happen by reducing income tax for the lowest slab, as
recommended by the Direct Tax Code report. It can be done by making GST
filing quarterly for MSMEs with less than Rs 10 crore turnover to ensure
they survive the slowdown. The GST Council can look at reducing rate
slabs and reduce the overall burden on corporates.
Immediate steps:
. Give auto sector incentives to invest and shift to electric vehicles
. Incentives to auto sector employees to upskill on electric vehicles
. Change GST collection to quarterly for companies below Rs 1 crore
. Reduce the GST slab rates
. Adopt the Direct Tax Code, cut income tax for the bottom slab
. Improve credit flow to both consumer and industry
. Reduce real interest rates by 135 basis points as cost of capital has to come down
. Change the credit culture in public sector banks
. Stimulus should drive investment, upskilling for displaced employees
. Factor market reforms, including bringing the cost of land down.
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