Budget 2020 must focus on reviving demand | Opinion
A demand stimulus (through tax cuts and increased spends on rural cash-transfer schemes), a focus on real estate and banking and finance sectors, and reducing the adventurist tendencies of investigative agencies, may be all that’s required to turn sentiment.Updated: Jan 19, 2020 11:29 IST
The National Democratic Alliance’s seventh Union Budget will be presented against the macro-economic backdrop of the slowest growth in nominal GDP in at least four decades and the sharpest increase in retail inflation in five-and-half years. As this newspaper has pointed out, there are some preliminary signs that the economy has bottomed out. This includes purchasing manager indices for both manufacturing and services, even factory output data, although most macro-economic indicators are still depressed. It is also evident that the high inflation is on account of supply shocks in some vegetables and that things should return to normal this month.
It’s not easy, amid the poltical controversy around the Citizenship (Amendment) Act, and happenings in Kashmir, to remember that the government hasn’t ignored the economy. Finance minister Nirmala Sitharaman listed 32 measures taken by the government to revive the economy during a debate in the Rajya Sabha late last year. There have been a few more measures since. Yet, going purely by macro-economic data, the situation isn’t showing any signs of improving. So, what should the government do? And, more importantly, what can it do?
One of the fundamental issues at this point in time is demand — there isn’t any. The simplest (and quickest) way to stimulate demand is by putting more money in the hands of people. That would entail two things: A cut in personal income-tax rates, and an enhancement in the spending on rural programmes, especially those involving some form of cash transfer (both the jobs guarantee scheme and the PM Kisan farm scheme do). Demand is also a function of sentiment. Not stock market sentiment, which seems unlinked from all else, but sentiment as driven by job and income-growth prospects, and a general sense that all is well. Right now, while there may a silent majority that believes all is indeed well, there’s a vocal minority that believes otherwise. The protests against the CAA may be either a cause or a symptom — but they are a reminder that there is a sense of disquiet in some quarters, including several academic campuses.
It is also becoming clear now that stimulating demand is more important than keeping inflation in check (and within the Reserve Bank of India’s comfort level) or meeting the fiscal deficit target.
In September, this column emphasised the need to focus on two sectors — real estate, and banking and finance. The government has done its bit in both, but more needs to be done. With every new financial crisis, it is becoming clear that the bad loans problem in banks and financial institution is like an iceberg — we see only a tenth of it. Policymakers should revisit the idea of a bad bank, which can take over all the stressed assets of banks and non-banking finance companies.
A digression may be in order here. With the quantum of bad loans and instances of bank fraud on the rise, investigative agencies have started looking at banks and bankers closely. With there being no effort to distinguish genuine business decisions that went bad from decisions prompted by pecuniary motives, and given the natural adventurism of some of these agencies, most bankers prefer to stay safe by simply not sanctioning any loans at all. The prime minister, at the Hindustan Times Leadership Summit in December last year, promised a framework to address this issue. Earlier this week, the government announced the creation of a board that will do just this — review all alleged frauds and ensure that bankers are not punished for honest business decisions. The finance ministry and the government now have to make sure this framework works. And indeed, seeing how the news is filled with businesses and businessmen falling afoul of one investigation agency or the other, maybe there needs to be a similar body for all companies.
Similarly, the finance ministry has announced measures to remove discretion from the working of the tax department. How this plays out, especially in the context of the tax department having to sweat revenues out of the system, remains to be seen.
As for the real estate, the September column argued in favour of a real estate bailout fund that could revive stuck projects that, apart from all else, were also a huge sentiment dampener. Hundreds of thousands of residential flats across India, many of them purchased through loans, have been in limbo with their developers running short of money. The finance ministry has announced a substantial (~25,000 crore) fund for this (along with the State Bank of India and the Life Insurance Corp), but it needs to close the loop by ensuring developers of stalled projects actually avail these funds. And it needs to increase the corpus, if required.
A demand stimulus (through tax cuts and increased spends on rural cash-transfer schemes), a focus on real estate and banking and finance sectors, and reducing the adventurist tendencies of investigative agencies, may be all that’s required to turn sentiment. Sure, a demand stimulus may entail higher spending, but the government should be willing to temporarily live with a higher fiscal deficit even as it translates its intent on the divestment front into some ready real cash. If demand does not revive by the end of March, 2020-21 could well go the way of 2019-2020.