Research & Analysis

Turbulent economy: Govt must be flexible

The Rs 100-trillion investment in infrastructure, promised by Prime Minister Narendra Modi is inspiring. It should change the economy, which is in a turbulent phase, though not acknowledged.

The past five years have seen many investment proposals in building modern ports, highways, railways, airports, hospitals and educational institutions, et al. And some of this has been in the road, airports and rail sectors too. However, given the impact it has vis-à-vis the country’s population, controlling it as suggested, should not be an official agenda, for it is often misused.

Modi, many would say has the capacity to do ‘magic’ and its happening. But he has also to contend with the global slowdown. Germany shrank by 0.1 per cent as its exports are hit. Dow Jones indicator tumbles 800 points or 3 per cent after bond market flashes a recession amid the US trade war and Chinese yuan manipulation.

Additionally, weak economic data across the world has unnerved investments. Indian stocks are doing no better, with these slumping everyday with some exceptions. The Sensex touched 36958 on August 14 from a high of 40,000 on May 23. Will Modi’s promises change destiny? It might, but if we listen to former Reserve Bank of India Governor Bimal Jalan it can take as long as two years, which is closer to another election cycle.

Jalan indicated that the private sector is still not investing, “may be due to post-demonetisation effect”. This means for the past three years, whatever growth at present, even 6.8 per cent from 7.2 per cent last year, is primarily due to the push by the government. In fact, this is the slowest GDP growth since 2014-15. The previous low was 6.39 per cent in 2013-14, following which the Narendra Modi government came to power in 2014.

This is straining resources and the pain is visible. Except for perhaps retail loans given by banks, there is a contraction in all other parameters which measure consumption in different ways. Last month the International Monetary Fund (IMF) and the Asian Development Bank (ADB) cut the country’s growth forecast to 7 per cent, citing global and domestic headwinds.

And this is at a time when the people as says Modi are becoming aspirational and more demanding. A good indicator alright, but if not supported by action, it can lead to problems. Jalan says that mere public investment is keeping the morale high and it comes at a cost to the revenue collection. It rose by a mere 1.4 per cent or Rs 4 lakh crore last cycle! The demand is high, as despite realising the need, the government is unable to give the necessary tax cut benefits to the people.

This has made the much-hyped ‘one nation one tax’ or the GST a burden for the entrepreneurs and start ups. There are many instances when start ups, having a sale of Rs 560 or so, ended up paying over Rs 20,000 as penalties. The GST law imposes compounded penalties on those who do not file returns every month.

The law fails to take into account that small ventures subsist on low margins and it equals to the tax demand. In other words, they are supposed to survive on no profit but face high tax demand and compliance.

The thinking behind the law seems to be that everyone is a thief and must be punished. This is ruining small businesses, entrepreneurs and start ups. Another consequence is high NPA for small MUDRA type loans, which is clogging public sector banks. For the government to achieve its motto of promoting entrepreneurship, it should impose no GST or any other tax up to a limit of Rs 25 lakh or more.

At the same time, it needs to do away with monthly returns for GST payers and annual returns for nil income taxpayers. This would undoubtedly be a great help to the informal sector which keeps the economy floating.

There are many similar bureaucratic mistakes which have deviated from the government’s policies. A person, who is not supposed to pay a single paisa as income tax, has to take the rigours of filing return with the help of someone he has to pay. This, obviously burdens the department with millions of unnecessary returns and crores of refunds. In these non-exercises, the nation loses billions in terms of money, manpower and business transactions. The big question is, can’t the nation do away with it?

It is strange that the bureaucracy on simple issues awaits instructions from the top. Multiple taxes on sought-after foreign portfolio investors lead to the stock market crash. Why cannot this be visualised? Similarly, the auto sector is reeling under 23.3 per cent fall in sales, the biggest contraction since 2004. It impacts tyre, steel, ancillary industries, closes down dealerships and has thrown 2.3 lakh people out of jobs.

The reasons are mainly two: Owing to NGT’s quixotic order of scrapping 10 and 15 year-old cars, the secondary market, which encourages new car purchases, has collapsed. Worse, is the newly enacted Motor Vehicle Act, wherein the buyers are shaken as they fear that car purchase is a bad investment as even the best maintained car has to be sent to scrap yard for no fault of theirs.

Therefore, the NGT order has to be scrapped. Nowhere in the world has such a rule existed. And the MV Act needs a review. Heavy taxes, parking charges, tolls have to be cut to put the industry back on rails. More so, as it is killing the secondary market, that creates demand in the US and Europe. It affects the industry and yes, even for this, the Prime Minister may have to intervene.

That agriculture is not in a happy shape is indicated by 14.1 per cent fall in tractor sales. The Rs 6000 annual dole may have some impact next year. But the farm sector is still in a bad cash situation. It wants reversal to cash economy, which they say is more pious than the slow digital trend. The FMCG is also in crisis.

Let the government intervene least and keep economy free of shackles. India has resilience. It would have survived the 2007 western sub-prime crisis but for the intervention of the UPA government that messed up the banking sector with over Rs 12 lakh crore of NPAs. But notwithstanding this, it can bounce back provided the rules are eased, businesses are allowed to breathe, policy is stabilised and liberal atmosphere prevails.

Prime Minister Modi has shown flexibility. A dialogue with the industry, chambers, small biz groups and farmers would embolden them to open up. And last but not the least the tax man must be put at bay.

 

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