Indian-economy-budget-2020

Budget Precepts - 1: Revitalizing Indian Economy

PM Narendra Modi recently held detailed discussions with Business Stalwarts, Economists and Entrepreneurs belonging to various sectors to seek their feedback and suggestions on policy measures to boost growth and improve sentiments.

A country’s GDP is the sum total of Public Consumption, Investments, Government Spending and Net Exports. Indian economy highly depends on the Consumption and Government Spending, the lowering down of which leads to slower growth. India’s GDP growth stood at only 4.5% in the September 2019 quarter and it is likely to be 5% at the end of this fiscal year. Most experts opine that the slowdown is rooted in the lowered demand problem.  

All eyes are now set on the Budget that is to be presented on the 1 February 2020. The cut in Personal Income Tax and Corporate Tax has already happened recently, and is least expected. Maybe Reduction is GST slabs can be hoped for in this Budget.

The Issues

The Agricultural sector since last five to six years has been adversely affected by climate change, the uncertain seasonal rains especially threaten the commercial crops. This sector employing the largest population must see structural long term reforms in terms of water management, irrigation infrastructure, land reforms and redistribution, focus on crops that are not water guzzlers, easing up of markets, development of facilities like cold storage to avoid huge wastage, etc.

The Construction sector was hobbled by the credit and liquidity problems rooting from the NPA crisis and vicious payment culture. Every default triggered cross defaults across the chain. The demands got highly affected. Digitalization and Formalization is a movement towards a cleaner economy. The recent push of cash by the Central Government through RBI will lead to great leaps forward and this sector expects much more from the upcoming Budget as well.  

The Automobile Manufacturing sector figuring in for 6% of the GDP and lakhs of job is facing a huge downturn. In July, the sales of vehicles across categories slumped 18.71% to about 18.25 lakh units, down from about 22.45 units a year ago in the same month. This has been the steepest fall in 19 years.  The industry’s demands include a reduction in GST to 18% from the current rate of 28%, which will help in an immediate price reduction. It could kick-start demand in the short term, particularly ahead of the coming festive season. Besides, it has sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles and introduction of vehicle scrappage policy, which will also boost demand for new vehicles. 

finance-minister-nirmala-sitharaman

The Address 

Although India jumped up in the Ease of Doing Business Rankings, the cost of capital is not decreased. The constant cuts in Repo Rates by RBI are not passed down by the banks and hence the Ease is not fruitful and complementary.

The synchronization of reforms is also facing a serious lag. If the Central Government is pushing some economic reform, then the State Governments should assist and supplement as well.

The Regulation, Licenses and Clearances giving system as well as the Dispute Resolution Mechanism must be fast tracked.

We capacity utilization which is only 60-70% must be optimized to generate and increase new demand. We have undertaken many reforms for the supply side, but the other side of economics must be focused upon as well.

Looking Ahead 

PM Narendra Modi vouches on the Demographic Dividend, Democracy and Demand as pillars for India’s progress. Similarly, there must be Clarity, Continuity and Consistency in the Economic Reforms. They should Confidence not only for the domestic investors but also for the foreign markets, not only for businesses but also for the people.  

Not looking at whether the money is white or black, letting the cash freely flow might fetch us double digit growth but it won’t be sustainable for a long term haul.

The current slowdown might be cyclical or structural, but more than anything else it is the clean-up cost that our economy is paying for major reforms like Demonetization and GST, which with sound fundamentals, will eventually lead up to a brighter and better future.