No government and no finance minister can afford to forget the ground realities. Reality hits back. It was but natural then that finance minister Nirmala Sitharaman had to take note of certain issues in the economy which she did not reckon with in her Budget speech on July 5. The Budget was meant as a statement of intent, grand intent, of the Prime Minister Narendra Modi government’s second term in office. It was felt that to mention problems in the speech would have spoiled the party, as it were. But more than a month-and-a-half after the Budget, the government had to respond to one issue it had not mentioned in the Budget, and another which was mentioned in it.
The first related to the automobile industry, a key part of manufacturing, and the only part that seemed to be doing well when manufacturing as a whole had been languishing through the five years of the Narendra Modi government’s first term, from the summer of 2014 to the summer of 2019. With the precipitous fall in sales since the beginning of this year, the auto sector was gasping for breath. The finance minister responded by allowing greater depreciation for the inventory, deferring the date of introducing the Bharat-IV rules regarding emissions and the switch to electric vehicles, and the promise that the government would buy new cars. This is almost a knee-jerk reaction. The government buying cars to stem the fall in sales is not exactly a boost to the economy. It would have been better if there was demand stimulus from the buyers at large.
The Rs 70,000-crore recapitalisation of public sector banks (PSBs), which was announced in the Budget speech, is meant for credit offtake in general and not necessarily for buying cars. The fact that this was reiterated at the press conference is a declaration on the part of the government that the credit crunch is real, and it is contributing to the sluggishness of the economy. But this is now combined with the near-mandate that the banks should transmit the reduction in interest rates of the Reserve Bank of India (RBI), and the banks should now align their lending rates to the repo rate — the rate at which RBI lends to the banks. This policy does not make economic sense because the banks, as commercial entities, will have to maintain their profit margins. The banks have not brought down their interest rates because they know that the market conditions are not conducive enough. The finance ministry and the RBI cannot force banks to lend or the business community and people in general to borrow.
The announcement regarding the withdrawal of the enhanced surcharge on Foreign Portfolio Investment (FPIs) is an interesting measure because the Modi government has been an aggressive tax collector. The motive was a simple one — of increasing the tax revenue, which would then be spent on welfare measures and on infrastructure. This was indeed the economic philosophy of Prime Minister Modi through his first term, though he and his colleagues would be loathe to admit it because this was so like the Congress’ socialist policy stance. The surcharge was an extension of this attitude. But the flight of FPIs over the surcharge triggered the alarm signal. The government had been claiming that foreign investments into India have been at a high ever since the Narendra Modi-led BJP came to power in 2014, but its bid to take tax advantage of the investments in the Indian markets was like killing the goose that laid the golden eggs as it were.
The Modi government’s eagerness to increase tax collections could have made sense if the economy was doing well. It is not due to a complex set of reasons. But the government just refused to accept the fact, that the world economy had not recovered from the 2008-09 financial meltdown, and that Indian exports were not going to go up any time soon. The Modi government has not been inclined to face up to the reality because that came in the way of the rose-tinted rhetoric about Mr Modi’s New India.
The government cannot hope to keep the problems facing the economy under the lid — this will not work any more because the stress is increasing. The jobs growth, or the lack of it, is the elephant in the room, and the government’s silence about it will not banish it. The government’s figure for employment is modest. Between September 2017 and June 2019, the number stands at 2,54,04,485, about a crore of jobs in a year. This is not a great number by any standard. The argument of the government and the BJP — that India’s growth rate is still ahead of all other leading economies — is small consolation given the size of the economies of China (three times that of India), and of the United States (eight times that of India).
The question remains whether the measures that finance minister Nirmala Sitharaman has announced on Friday are enough to turn things around. It may not. What is required is not merely a slew of corrective measures, but there is also a need for change in the approach to the issue of economic growth. The government is focused on taking the Indian economy to the $5 trillion level. That may happen in the next decade, but that would not really make things easy for the people. India is still not the best place for doing business, despite the improvement in the “ease of doing business” ranking in the past five years. There is need for major changes at the ground level. The best-laid plans are not enough. The government of course can only do so much. At the end of the day, it is the people who are left holding the baby. Somewhere, the businesses, farmers and entrepreneurs should stop looking to the government for help. They should get down to doing things themselves. Politicians, including Mr Modi, do not have any magic solutions to offer.
