Hashmat Ali

(Special to India Tomorrow)

 

NEW DELHI, JULY 18--While the economy has been encountering a slowdown since 2017, the covid-19 broke out and ravaged the economy of the country. According to Goldman sachs and IMF’s world economic outlook, India’s GDP growth rate likely to be contracted by 5% in financial year 2020-21. This will lower tax revenues, and limit government’s ability to spend and support growth. The negative growth rate is primarily contributed by negative growth in gross fixed capital formation (GFCF), which broadly is the investment in the economy. The government final consumption expenditure (GFCE) has supported the growth momentum, however, the increase in consumption expenditure followed by cutbacks in capital expenditure, which are reflected in the negative growth in investment in real GDP data.

 

No wonder, despite strong pressure from corporate for large fiscal stimulus, the government has primarily banked on credit guarantees and liquidity support as   there is little room to relax fiscal deficit target without inviting credit ratings downgrade. Government may not spend its way out of current economic collapse, made worse by the covid-19. Since the government’s market borrowing has already been increased by 4 trillion Rs on top of about 8 trillion Rs proposed in the budget in FY21. These additional borrowings would certainly put pressure on the sovereign debt papers yield going forward. Raising sovereign debt and deficits indefinitely in an emerging market  like India which suffers a lot of demand and supply structural problems, that   dependent on capital flows and rating agencies is a recipe for complete macroeconomic instability. Unwise government spending will burden taxpayers. government‘s liabilities are not easier to finance in a recessionary economy when growth and taxes swept down simply by virtue of decreasing profits and incomes.

 

Mere stimulus packages, drastic cut in the credit policy rates and inducing banking sector to fund investment are not sufficient enough to revival of the economy. A holistic strategy, including the ways and means to accelerate demand for capital and for goods and services is of utmost priority. That won’t need much finance but just a political intent for policy haul up.

 

It is not very useful to give a large demand boost when supply will slowly limp back towards normal. The disruptions in supply with the lockdown were greater than that in demand, even as demand for essential items remained intact and consumers substituted towards E- commerce products. As ex-ante demand must exceed supply to induce positive EBITDA and profitable production. Therefore the first priority, of course, is on food security cover for the distressed as well as healthcare facilities, expanding these also create employment.

 

Job losses as well as fear of covid-19 triggered panic reverse migration to rural areas. Congested urban centers have been more exposed to foreign visits as well as high infection rate and spread of it. Labour return would be there but will take time, and not be in excess, hence government may create opportunities in rural areas. Most economists tell us the same best way to reduce excess migration to urban centers to improve opportunities and conditions in rural areas. Since big cities will continue to be covid-19 hotspots for quite some time to come, entire industrial and critical supply chain should move to smaller cities and rural areas. Requirement of more spaced out work floors and spaces will be cheaper there. Urban firms will be able to take better care of workers; living conditions of workers will improve.

 

Infection in congested agricultural mundis has allowed newer marketing arrangements to develop, giving more options to farmers and consumers. Repeal of the APMC act will remove the entry barrier for the private investment and allows it to establish new markets, giving farmers the freedom to decide who to sell their produce to, and create competition among different markets for the farmer’s produce. This will attract investment in food processing and storage and help in export development in agricultural products. It will keep food inflation low, allowing room for more monetary stimulus, and lowering interest rates ,will help debtors particularly debt laden large companies. As debt laden large companies would be more interested paring down debts, postponing capital investment and cutting jobs to protect their operating margins and avoid punishment by capital markets.

 

On the MSMEs side, in addition to cash flow issues, the small businesses are troubled by increasing compliance burden involving multiple return filings, licensing and reporting requirements particularly those related to GST.  Why should a micro enterprise with three to four employees, need to file monthly, quarterly, and yearly GST returns in addition to several others such as income tax returns and TDS returns? Cutting these compliances to bare minimum will not cost any money, in fact, it will free up a substantial part of government working machinery that could be put to better use, where it will be most effective and necessary. Doing this the government can substantially reduce regulatory sandbox that hampers the prospects of small businesses.

 

Small exporters, most of whom survive on as low as 2-3% EBIT margins, are being exploited by banks that extract as much as 3-4% of their export profit as forex conversion charges. Making RBI to get involved in retail forex trading could stop this exploitation. Government should let the rupee weaken instead of raising import duties; it will encourage export and will support indigenous manufacturing. Letting rupee down will check unnecessary imports also. The government should also junk the practice of imposing different kinds of import duties and inverted duty structure on different categories of fibres  to make sure fibre neutral trade structure. That would give a big push to textile industry.

 

  Government may consider reversing corporate tax cuts that have not led to any big investment. Instead, allow more deduction and exemption and cut in personal income tax. The purchasing power of the consumers, which is crucial to revive consumption demand, is dependent on the disposable income of consumers, and since increased flow of income into the hands of the consumers is vital to accelerate the demand for goods. It will pave the way for the demand for capital to invest in restarting the depressed economic activities. It is the affluent households who derive discretionary consumption demand for items such as consumer durables, recreational services and homes. Unless, they can  get relief on direct and indirect taxes they have to pay on their consumption, it will continue to hinder households’ demand and in turn the GDP growth of the country.

 

 There is a need to boost the technical capabilities of organizations like the CDSCO to remove impediments to the local production of high quality drugs and medical devices. Thus, the government should put an end to price caps in medicines and let the competition be built in the domestic pharma sector. The price cap has failed to make masks, PPE kits, sanitizers and RT-PCR test kits cheaper and it has not brought the costs of transplant & replacements surgeries down. The country’s automobile industry too, had been already struggling due to excessive regulatory rent seeking and a rush and pressure to adopt tighter Bharat-6 emission standard that will, of course, need enhancing CAPEX for technological upgradation . Covid-19 induced disruptions has further dampened its prospects, and in turn those of operating in its ancillary industry such as auto components suppliers. Components manufactures have been pushed to the wall by the total shutdown in March.  Thus, the government may consider relaxing the implementation of Bharat-6 emission standard for a year, it will support struggling Auto components suppliers and dealers employing lacks of workers, without any liquidity push or fiscal stimulus. Moreover, Auto demand is highly income elastic and thus cutting GST on vehicles will encourage their sales without any loss to tax collections.

 

 Reality industry which is another struggling industry for quite some time in India, real estate industry is a mirror for the whole of Indian industry. The emerging picture is not looking good and that helping real estate will help its ancillary and dependent industries such as quarry and aggregates industry, steel, cement, electrical appliances to interior designing industry.  And thus, substantially reducing circle rates, stamp duty and registration charges may help in selling pile of unsold inventory and could generate working capital liquidity for defaulting builders. Government should take over the failed projects and complete them. The overall tax buoyancy gains will make up for the loss from cutting registration charges and stamp duty.

 

So while the lockdown has been lifted with restraints to prevent the spread of covid-19. The human capital, which is one of the key inputs of production, needs protection from the virus and therefore the government should not short shrift in spending to strengthen the public healthcare system. The creation of demand is critical, and it will emerge from business confidence. Thus, government should ensure a predictable business environment. Complex trade and investment rules and difficulties in enforcing contracts continue to hinder investment. Similarly, an impartial regulatory system that does not discriminate between domestic and foreign entity will be helpful. E- commerce sector where such rules and regulatory dictates taking their hard knocks on, government wants E-commerce companies for displaying the country of origin for products sold. E- Commerce companies worried that displaying the country of origin for the stocks that they have hold may result in the items not getting sold. With covid-19 disruptions hurting business, this could be an additional blow.  Government should remove all restrictions and free up the E-commerce industry and it should allow the E-commerce companies some relaxation in mandatory registration for sellers on E-commerce platforms and in TCS (tax collected at source). Their working capital gets impacted on account of TCS credit being blocked. And centre should consider for deferment of equalization levy or Google tax and give relief for E-commerce companies from this equalization levy.  E- Commerce will help keep the growth engine firing by supporting all kinds of manufacturers.

 

Government may focus on rationalizing the GST rate and interchanging of goods and services within the GST brackets. the government may consider to improve liquidity as well simplify compliances  such as allowing refund of accumulated GST credit due to inverted duty structure. Permit payment of IGST on import of goods and services using input tax credit from credit ledger, and allow ITC of CGST   to be transferred and fungible across states. And making allow of refund of input GST paid on capital goods to some sectors on selective basis. Government should either allows ITC for the GST paid or companies be allowed to take soft credit against GST ITC dues as a collateral to create adequate liquidity. Government could also make a large contribution to liquidity in the economy if it fast tracks all dues; with 50 days as the grace limit. This should become the practice and will reduce the future credit costs. Cash rich companies should contribute by clearing their dues to MSMEs in their supply chain. Adequate liquidity makes it unnecessary to hoard liquidity for most firms.

 

Access to adequate capital has never been significant than in these current times of economic disruptions, to boost foreign investment and getting access to capital, the government should allow tax exemption to certain category of investors on their income streams such as dividends, interest and capital gains arising from an investment made by them in India, Whether in the form of debt or in the share capital. This will attract fresh rounds of PE and VC capital; also, PE and VC funds may opt to stay invested longer. Allowing such a wide ranging list of qualifying investment for tax incentives would allow adequate capital for the investment demand that will encourage capital expenditure, and would allow capital formation to flow into the growth of the economy.

 

(The writer is a research scholar in finance)