After dragging the market into a trough, the government is currently contemplating ways to pull things about. Before commenting on the various steps that it is contemplating to kick-start the market, let us go back in time to what the Narendra Modi government had inherited and determine just how things have become progressively worse.
Modi has been handed a crippled market with a non-functioning bureaucracy, non-functioning banking platform, a crawling rural market along with a reluctant private sector. Cut to the current scenario and we’ve got a partially functional waiver, an all-but-dead banking strategy, a rural market that borrows and neglects to cover, come rain or fair weather, and a zonked private sector that doesn’t know what hit it. That is the picture which recent headlines paint.
More color was added following the current pair of GDP amounts which saw the market slipping to some three-year low just as gas prices touched a three-year high (despite international crude prices halving, but that’s another story).
With no explanation in the hand, the Modi government did exactly what authorities typically do, call a meeting. Media reports indicate that strategies are being exercised to get the economy on track. But are they enough or only a case of old wine in new bottles?
The government is considering increasing spending by Rs 40,000 to 50,000 crore, state reports. These are tentative amounts because the Finance Ministry is allegedly not familiar with a wider fiscal deficit.
However, if a patient in the ICU requires oxygen, then one needs to not haggle over the price of the cylinder. Just a little slippage is easily retrieved in following decades as the increased tax base due to demonetisation and GST will help refill coffers quicker. Not spending money now could be deadly. Further, there are means by which the authorities can raise capital — it still has only under six months prior to the year ends.
One such thing that has been discussed in the meeting was that the disinvestment of Air India. In his budget speech Finance Minister Arun Jaitley had set a goal of Rs 72,500 crore out of divestment but till date has handled just Rs 15,000 crore. The government has space to speed up its divestment procedure.
The poor health of banks, which resulted in the nearly freezing lending, has become the biggest reason for the present mess. A huge area of the blame needs to be placed on the authorities for not diagnosing the severity of the issue and applying an ointment on an injury that warranted an amputation. Even in the budget, the FM provided for just Rs 10,000 crore to capitalise banks, that are sitting on non-performing resources worth Rs 6.41 lakh crore.
Just capitalising the banks will only purchase time: The banking system requires a long-term solution to survive first and help revive the market afterwards. This is really a long-drawn procedure which may take years.
Among steps which are being considered and ones which may bring quicker relief are stimulus measures to enhance exports, and provide relief to SMEs and push investments in rural infrastructure and affordable housing. None of them may eliminate unless GST is operational, which is still a couple of months off.
While the government is working on smoothening that the GST procedure, there are regions where it can concentrate its attention and get quicker results. Allocating and spending additional money on improving rural infrastructure may result in more money in rural India that may drive demand.
Exports, especially the non-IT ones, have to be incentivized and quick. GST’s teething problems have come in a time when festive requirement has been driving peak season. Relief for exporters will be directly represented in the GDP.
Finally, the authorities will need to help incentivize consumption that’s taken a hit. Since the central bank might or might not assist the authorities despite the downturn, due to its fixation with inflation, the authorities will need to find ways to drive consumption. One method of doing it is to make additional jobs, at least in the government sectors. It will help to fill these vacancies fast since this could have a multiplier impact on the market and increase consumption.
With the impact of the Pay Commission and one-rank-pension wearing out, the authorities will need to find different means to put money in the hands of individuals to bring the market on track.