No 'out of ordinary steps' in Nirmala Sitharaman's presser, but willingness to offer solution is positive sign for investors

The fact that Union Finance Minister Nirmala Sitharaman called a presser to talk up the economy and spell out some measures to allay investors concerns is a good sign; it shows that the government is finally acknowledging the real state of the economy — that is in a worryingly slow course — and is willing to work on remedial measures. Remember, the presser happened shortly after NITI Ayog vice-chairman, Rajiv Kumar’s warning that economy is in peril and “out of the ordinary steps” are required to rebuild the lost trust in the financial system. [caption id=“attachment_6941571” align=“alignleft” width=“380”] File image of Finance Minister Nirmala Sitharaman. PTI[/caption] It is doubtful whether Sitharaman offered any “out of the ordinary steps” but surely there was a clutch of measures to revive the investor confidence. Friday saw the finance ministry rolling back some of the decisions announced in the Union Budget 2019 to pacify investors and offer some tax relief to portfolio investors and start-ups. These are indeed steps in the right direction to rebuild investor confidence. The way Sitharaman compared India’s growth with that of Chia and US is surprising, though. The argument that India’s growth is still above that of the US and China wouldn’t go down well with the informed middle class. Time and again, economists have laughed at the logic of comparing growth rates of these giant economies with that of India. The US is a $20 trillion economy and China is over $13 trillion. India is just at $2.7 trillion. On a smaller base, bigger growth percentage figures do not matter much. Also, that “the world growth rate is slowing below 3.2 percent” doesn’t mean we aren’t better off in the world.

In fact, this is the same government which once ridiculed former RBI governor Raghuram Rajan for his comment that India is like a “One-eyed King in the land of the blind”. Sitharaman appeared like endorsing Rajan’s statement but using different words.

Some of the measures announced in the presser — withdrawal of enhanced surcharge on foreign portfolio investors (FPIs) and domestic investors restoring the pre-Budget position, quashing angel tax for DPIIT registered start-ups — are the reversal of earlier decisions. The decision to ease income tax filing and GST compliance process steps in the right direction. Similarly, quicker GST refunds to MSMEs and the promise of accelerating dues to private sector entities will ease cash flows. Repeating the Rs 70,000 crore capital infusion promise for public sector banks, originally announced in Budget 2019, again is no new announcement. Out of the Rs 70,000 crore, the actual growth capital for banks will only be around Rs 30,000 crore as per various analyst estimates. This is because banks have heavy provisioning burden on bad loans and required heavy capital to meet the regulatory norms for minimum reserve. Similarly, making corporate social responsibility (CSR) as a civil matter and not a criminal matter is, again, a reversal of a totally unwarranted decision taken earlier by the government. A host of decision reversals and measures announced in the presser can alleviate the concerns of businesses. But the big announcement on a stimulus package and sector-specific tax reductions, especially for the struggling auto and FMCG sectors, were missing in the presentation. Probably that will come in the next round.

But the auto sector has some good news here. Sitharaman said the government will defer higher registration fee till next year. Also, decisions to allow BS-IV cars to be purchased till March 2020 and asking government department to replace old vehicles will boost the sector. Right now, private sector investors have lost trust in the economy. They are sitting on cash but not willing to put it on the table to fund projects. Private investments play a key role in any economy and no economy can thrive only on government spending alone. Logically, in the absence of private sector participation, India’s economic growth fell to 5.8 percent in the March quarter of 2018-19, the lowest in 20 quarters, thanks to a sharp slowdown in investment and manufacturing growth and contraction in agricultural production. Stalled projects are piling up since funding has become scarce. India’s banking and NBFC sectors are in a paralysed state on account of big buildup of stressed assets and severe liquidity crunch. They are in no position to lend large amounts to businesses. The bigger takeaway from the Sitharaman presser, as mentioned in the beginning, is that the government seems to have woken up and smelled the coffee on the economic scenario. Finally, a sense of urgency is seen in addressing the serious economic slowdown which has already manifested in the earnings of companies across segments ranging from auto to FMCG. The big wake-up call came when government’s own advisor, NITI Aayog warned that the economic crisis, at present, is developing to an unprecedented level. The government finally acknowledging the problem and showing the willingness to offer solutions is a positive signal to the investor community.