Financial system is in intensive care with no fast reduction in sight; can reducing private tax, elevating GST provide a magic treatment?


Economists love to offer names for durations of extended financial slowdown. The previous chief financial advisor, Arvind Subramanian, calls the present financial disaster the nation is experiencing as India’s ‘great slowdown’, one thing he equates to the financial disaster India witnessed in FY’91-92 when the gross home product (GDP) progress fee fell to 1.1 %, foreign money tumbled and most macroeconomic indicators collapsed.

The foremost discovering of Subramanian in his newest analysis is that India isn’t experiencing merely a consumption-led slowdown however a mix of cyclical and structural elements which have been evolving over a time period.  Components like absence of land/labour reforms, he observes, have been prevalent for nearly twenty years. He would reasonably blame the autumn in investments and exports as essential causes for the present financial state of affairs.

Why is instantly every part collapsing now, Subramanian requested whereas delivering a speech on the Bangalore Worldwide Centre based mostly on his analysis with Josh Felman, on 11 December.

Keep in mind, post-his exit from the NDA-government as Chief Financial Advisor (CEA) in June 2018, Subramanian had raised some severe questions on the Indian economic system. Of those, an important one was his analysis paper on how flawed India’s new GDP series is the place he cited the sharp disconnect of headline numbers with a bunch of macroeconomic indicators.

The previous CEA’s revelation that the brand new GDP knowledge doesn’t move the scent check triggered an intense debate, with economists and authorities officers debating the declare.

 Economy is in intensive care with no quick relief in sight; can cutting personal tax, raising GST offer a magic cure?

File picture of former CEA Arvind Subramanian. Reuters.

Subramanian’s newest observations

A few of the main observations of Subramanian’s Bangalore speech have been:

One, India’s ‘great slowdown’ doesn’t have fast options. There isn’t a simple treatment for the present meltdown provided that financial institution NPAs are nonetheless excessive and rising, NBFC financial institution stability sheets weak, and energy, actual property sectors going through main issues.

Two, reducing private revenue tax fee at this juncture is a foul concept, so is growing the GST fee when the economic system is in a multitude. There may be an oddity within the authorities reducing company tax on one facet and climbing GST fee on the opposite in a situation when the economic system is going through a serious slowdown.

Three, the RBI ought to provoke the subsequent spherical of NPA clean-up or Asset High quality Assessment (AQR), now. It shouldn’t be restricted to NBFCs but in addition to banks as a result of problematic loans have returned to the banking system following the NBFC disaster.

4, the Insolvency and Chapter Code (IBC) has helped however hasn’t proven the specified outcomes but. Solely about Rs 82,000 crore has been recovered to date. It requires extra fine-tuning to make it successful past simply metal corporations.

5, there’s a large belief deficit in India’s official knowledge, primarily GDP, employment and consumption figures. The federal government ought to act to regain this misplaced confidence as dangers incorrect coverage formulations based mostly on distorted knowledge.

Financial system in misery

A day after Subramanian made his speech, the newest knowledge confirmed that the economic system was in a tailspin. The Index of Industrial Manufacturing (IIP) for October got here as a shocker. The IIP contracted by 3.8 percent in contrast with a contraction of 4.three % in September and 1.Four % contraction in August. Retail inflation, alternatively, rose to five.54 % in November in contrast with 4.62 % in October. These numbers present that the economic system isn’t trying any restoration to date, regardless of the a number of measures introduced by the Narendra Modi authorities to prop up progress, together with a steep cut in corporate tax, main disinvestment initiatives and a collection of financial coverage fee cuts from the Reserve Financial institution of India (RBI).

Lets take a  nearer look to know the extent of the autumn. The manufacturing phase contracted by 2.1 %, electrical energy progress contracted by an enormous 12.2 % – the bottom in seven-and-half years, progress in capital items phase that displays the funding exercise on the bottom plunged by destructive 21.9 % (lowest progress in over six years) and infra/building sector progress at destructive 9.2 %, once more, the bottom in six and half years.

Shopper durables contracted by 18 % whereas non-durables shrank by 1.1 %, marking the bottom progress in six-and-half years a minimum of. Much more stunning is the truth that grwoth in shopper durables is tumbling regardless of October-November being the height festive season in most elements of the nation. Within the second quarter, GDP fell to 4.5 % following a 5 % progress within the first quarter. With inflation inching up and progress slowing, some economists have flagged a state of ‘stagflation’ within the economic system.

The persisting slowdown has created a vicious cycle of low demand and consumption, a decline in investments/exports and financial institution credit score and a excessive quantity of impaired property. The issue exaggerated within the Indian economic system with the collapse of IL&FS in October final yr. The liquidity shock didn’t finish with one NBFC, as a substitute, the disaster unfold to different identified names like DHFL that was later advisable for chapter. Banks considerably lowered lending to non-banking sector. Even now, the true extent of dangerous property within the NBFC area isn’t totally identified.

Does Subramanian get it proper?

The previous CEA’s speech at Bangalore does not likely spotlight any new points. It additionally doesn’t provide any main prescriptions to resolve the disaster situation past what’s already mentioned in financial circles. However most likely the most important takeaway from his speech is that the federal government shouldn’t go in for knee-jerk steps to counter the slowdown and set unrealistic targets, an apparent reference to the $5 trillion claim. As an alternative, the federal government ought to settle for the brand new regular of sluggish progress and take a extra measured method with out placing its funds in larger hassle. Over to the federal government now.


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