Edit & Opinion

Induced Inflation: Policy overhaul critical

India needs to look at its falling demand, rising bank, power and fuel charges, high tax and toll rates. This is an induced inflation, whatever the indices might say, amid perceptible slowdown. The nation forgets that commodity prices are on the rise, incomes are falling and policies like the new MV Act, atrocious banking policies and transport tariff, whatever the officials may say are adding to the aggravating situation.

The rising power charges in States like Uttar Pradesh are causing price rise and slowdown, even in agriculture. The non-banking NBFCs, key lenders to MSME are in a crunch owing to massive loan default by the road toll collectors of IL&FS. Officially it lost Rs 91,000 crore in 2018. Though this is less discussed it has severely affected many micro-financing institutions.

The latest PMC bank virtual closure exposes the cooperative sector as well. The modus operandi is almost similar to the IL&FS. The latest Asian Development Bank assessment further brings down the growth rate to 6.5 per cent against the official estimates of 7 per cent. In the last quarter it touched 5 per cent, lowest in six years.

Prime Minister Narendra Modi is trying hard with the US CEOs and others to lure investment. It is taking time to get translated on the ground. Even the nation’s richest are melting, according to Hurun India Rich List 2019. Their cumulating 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 the richest Ambani rising by 3 per cent and upcoming Adani by 33 per cent. Shanghavi of Sun Pharmaceutical lost 20 per cent wealth. LN Mittal of Arcelor Mittal lost 6 per cent. Eight other super rich also saw decline in wealth. The list indicates tough competition among the rich as also that they are hit by the slowdown. This also indicates that their overall decline is the result of the industries they are having. In short, the slowdown is more encompassing.

The Finance Minister despite defending policies agrees 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 corporate 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 academics. Overall the Indian corporate had been paying 48.3 per cent taxes, according to OECD, including tax on dividends it pays to its shareholders, who also pay another tax on it. This is tax on tax and it continues.

Only 18 countries of the 94 in OECD database in 2018 have rates over 30 per cent. It was 58 in 2000. Indian corporate despite present cut would pay over 38 per cent as taxes. They were paying 48.3 per cent now.
The problem is that individuals still have the highest rate of 42.5 per cent. With other indirect taxes, even after 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 citizens are left with?

Atrocious tolls, parking charges, passenger taxes add to the woes. There are also extortions on the road — it is by the insurgents in Nagaland and some other North-Eastern States or “suvidha shulk” by law enforcing authorities in other places. Somewhere the country is unable to understand its economics. The government expenditures increase and business gasps for its inability to recover the basic cost.

Despite easing of norms, no poor can dare do a simple business unless he can create the warmth for the law enforcers — municipal, panchayat or State. This is despite efforts being made by Modi to root it out. The sufferers say that his stringency has only led to rise in rates as “risk for perpetrators grow”. Even the corporate or even small businesses or educational institutions are not free from it.

Naturally the crisis continues. The latest RBI annual report 2018-19 (FY 19) confirms the difficult path. The GDP growth rate has slipped to 5 per cent in the April-June first quarter. The collapse of automobile, textile and diamond industry, thaw in IT sector, rising NPAs, tightening of banking charges and norms, failing manufacturing sector and sluggish consumer demand lead to deceleration.

There is cash crunch and it is affecting the rural, farm and wholesale sectors. The forced government rules of transacting through banks is delaying deals and adding to the cash crunch. India does not learn from either European or the US sub-prime crash of 2007-8. When we move through banks, simply loans, perceptible volume increases but actual suffer as there is no cash quantification, which is fast as well as check on hyped up transactions.

The system needs cash lubrication, which in the wake of demonetisation has been drying up. The Chief Economist of Yes Bank Subhada Rao recently says that people need to have cash for the supply-side changes to yield benefits. She says that spree of job losses and high unemployment has led to the demand fall. It is a key reason for the slowdown.

As eight core sector growth slows to 2.1 per cent, the wage losses have increased. The farm sector, MSME, transport and jewellery and retail also thaw. Low demand for trucks has made life difficult for about two crore workers. Small jewellery sector in Surat employs 66,000, MSME about 11 crore and farm sector over 54 per cent of total workers. The solution is not in rate cut but deciding a floor interest rate of 9 per cent for depositors.

Expecting a demand boost in such a scenario is a dream. It requires a mix of short and long-term measures for demand 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 only risk is the Opposition and particularly the Left, who have little understanding of the economics and crisis. Mere government bashing would not do.

The NITI Ayog has to take a lead in generating new thoughts and formulate a people-oriented policy. If it forms a group its Member Secretary should be from the industry to reflect the actual deliberations. The situation is difficult. But it should be the bottom. Deliberations and proper not euphoric, publicity-oriented actions may begin the trajectory for growth.

 

…INFA

 

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