Finance Minister Nirmala Sitharaman's speech on Friday was significant for three reasons. First, it came just after the Krishnamurthy Subramanian, Chief Economic Adviser (CEA) had argued that in a market economy, companies have to fend for themselves and could not turn to the government every time there was a slowdown. By aiding sectors every time there is a problem there would be moral hazard generated. This was followed by the Rajiv Kumar, Vice Chairman of NITI Aayog making a remark that the slowdown we are witnessing is one of its kind and a serious variety which was quite unprecedented. The finance minister, interestingly, had given a different view.
First the government was there to support sectors that required help. Second, Sitharaman reiterated in the beginning and at the end that India was the fastest growing economy in the world based on data from multilateral agencies and hence we should be happy.
The second significant point made by the finance minister was that these announcements were not the only ones and that there would be two more sets of policies to brought in the next few weeks. This is heartening as it assures industry that the government is ready for a continuous conversation which will result in appropriate action.
The third takeaway is that this set of announcements is not exactly a stimulus but direct response to various pain points caused both by external factors and earlier policies that had affected some sectors significantly, thus exacerbating their positions.
There is really no direct expenditure in the package as what has been spoken about like additional spending which would have stimulated specific sectors. But each announcement made is welcome and would have a positive effect.
The rule relating to taxation of foreign portfolio investors (FPIs) was probably the most effective measure which can mean some loss of income to the government as the pre-Budget position is restored. But this should stem the outflow of these funds which has affected both the stock market and the rupee.The latter has had a virtual free fall in the last couple of fortnights.
The issues relating to tax harassment and refunds for all players including the small and medium-sized enterprises (SMEs) is an operational issue which will make life easier for companies and is hence the right balm. The same holds for the corporate social responsibility (CSR) violation rule which has not been withdrawn but replaced from criminal to civil liability. Corporates were under tremendous pressure post-this rule being introduced where failure to comply could have criminal consequences.
The proposal to remove the taxation clause for angel investors is timely and falls within the aspiration of encouraging start-ups.
The two sectoral pain points for the banking and auto sector deserve to be put in perspective. Bank recapitalisation of Rs 70,000 crore is a budgetary announcement and not a fresh set of money being induced. The significance is that it will be induced at one go rather than over the next seven months. The fact that the FM spoke about Rs 5 lakh crore of lending being enabled indicates that this capital will be provided to both weak and strong banks to shore up net worth and hence can be interpreted as being meant for restoration and growth capital.
A back-of-the-envelope calculation shows that with a CAGR of 10 percent Rs 50,000 crore can be associated with growth capital and the balance used for shoring up capital level of the weaker banks especially those under Prompt Corrective Action (PCA).
There has also been talk of co-origination of loans by banks and non banking financial companies (NBFCs). This is an interesting proposal which needs to be tracked, as presently the problem is of risk aversion of banks to NBFCs rather than the absence of funds. This is not something that can be achieved by diktat and hence will take time to work out.
The announcement of getting banks to link rates with benchmarks could be a beginning for improving rate cut transmissions. Also, the one-time settlement for SMEs is good though should be done with care so that the quality of credit and credit service is maintained and not compromised.
The other critical account pertains to the auto sector. Correcting the perception that Bharat IV vehicles have to be done away with by March 2020 from the buyer view point is welcome as this thought has kept purchasers away. But auto manufacturers have to still contend with this switch. Similarly, the government is doing away with its internal policy of ‘no new car purchases’ even for replacement which was followed for saving on expenditure.
Intuitively, one can see the auto ancillary sector benefit as they receive fresh orders as well as payments which will benefit them. While this is good as it is a large purchaser, the question is when will this happen as the Budget may not have space. There is already fear that there would be serious revenue shortfalls this year and hence cost cuts can be expected towards the end of the year. Hence this should be kept in mind here.
Finally, for the infra push there has been a lot spoken. It should be interpreted more as facilitating the same rather than accommodation from the Budget as it has been more or less fixed under CapEx of Rs 3-3.3 lakh crore which includes defence. Hence, the vision is that this requirement of Rs 100 lakh crore over five years would require a lot of drive from the private sector.
The finance minister also spoke of giving a boost to the bond market by creating a new agency for providing credit enhancement. We need to see how this works as in the past there have been institutions and schemes for infra finance and enhancement that have not quite worked.
Therefore, the policy package is in the right direction. It shows that the government will be directing them in conjunction with the troubles of various sectors so as to ease pain points. The impact will be positive but will take time to work out especially for banks and auto sector unless all the plans as executed in a week’s time.
The operational issues would be an ongoing process. But for sure the FPIs should be enthused and the new week should see some revival in the markets- both stock and forex.
(The writer is Chief Economist, CARE Ratings)
Updated Date: Aug 26, 2019 09:17:35 IST