Livemint | Govt looks to reverse economic slowdown with a stimulus package

Aug 11,2019

The government is stitching together a set of measures, including tax cuts and targeted sops, to reverse an economic downturn, three people aware of the ongoing discussions said, amid fears of a global slowdown.

The idea is to roll out a host of countercyclical measures, including sectoral incentives and confidence-building steps for the private sector, to stimulate the economy that is grinding through losses, layoffs and an investment freeze.

The measures being considered include steps to boost infrastructure investments; goods and services tax (GST) relief to specific sectors, including the automobile sector, that could boost demand; ways to further cut red tape on cross-border trade and steps to improve ease of doing business, the people cited above said on condition of anonymity.

Preparations for a GST Council meeting are under way, but it will be convened after the finance ministry takes a view on the extent of benefits to be given, said the first of the three people cited earlier. “We have heard the industry’s demands including of a rate cut. A decision will evolve very soon," said the person. Anand Mahindra, chairman of Mahindra Group, had last week urged the government to consider temporary relief on GST either in terms of a tax slab change or reduction or removal of the cess on vehicles to stimulate the sector.

While the below-target tax collections and the fiscal glide path mandated by the Fiscal Responsibility and Budget Management (FRBM) Act constrained the government from providing a fiscal push in the Union budget, there is now a rethink on the approach. “We may use the escape clause (in the FRBM Act) for deviation in the fiscal deficit glide path up to 50 basis points. The current economic scenario, where private investment has dried up, may warrant such a move. A final call on the details will be taken by the Prime Minister’s Office," said a second government official.

A panel led by N.K. Singh to review the FRBM Act had suggested an escape clause, allowing deviations up to 0.5 percentage points of GDP, based on triggers including far-reaching structural reforms in the economy with unanticipated fiscal implications, acts of war and farm distress. If the finance ministry uses the option, it may give the government leeway to spend an additional ₹1.15 trillion in the current fiscal.

The package will have concrete steps to implement the government’s ambitious plans for ₹100 trillion infrastructure investment over the next five years, said a third official, who is privy to discussions between finance and other ministries. Industry watchers said the biggest challenge is to find a way to lift the sentiment, and galvanize businesses and the economy.

“Many investors who took the risk of completing infrastructure projects are not finding a way to divest them and earn a good return due to the poor sentiment in the equity markets and in the banking sector. Government-to-government arrangements can be explored to bring foreign investment into India in the sector," said Vishwas Udgirkar, partner at Deloitte India. Ensuring that project implementing agencies function efficiently and in a stable manner is important in reviving the infrastructure sector, said Udgirkar.

Multiple high-frequency indicators have pointed to a sharp slowdown in demand, both in rural and urban India. The automobile sector is going through its worst phase in decades due to the prolonged slump in demand, leading to massive job losses.

On Wednesday, the Reserve Bank pared its growth projection for the year to 31 March to 6.9% from its June forecast of 7%, while reducing policy rates by 35 basis points. It maintained that risks to growth are tilted towards the downside, with domestic economic activity remaining weak, while the global slowdown and trade tensions have intensified.

Finance minister Nirmala Sitharaman has been meeting industry representatives across sectors—banking, automobile, foreign portfolio investors, micro, small and medium enterprises, industry associations and real estate developers—since last Monday. The minister wants to listen to the challenges faced by companies and has promised to take necessary policy-based actions “fairly quickly".

On Sunday, Sitharaman met industry executives from housing and infrastructure companies and representatives of homebuyers. “A lot of useful discussion happened at the meeting with the real estate industry. We looked at a number of issues, clarified a number of issues and the government will be addressing these in the days to come," news wire PTI reported, citing housing minister Hardeep Singh Puri, who attended the meeting.

Kerala finance minister Thomas Isaac on 9 August tweeted that the tight fiscal policy is proving to be counterproductive and that monetary policy alone cannot pull the economy out of the “present morass". “Hardly a month after the Union Budget, Assocham demands a stimulus package of ₹1trillon ‘to initiate an investment cycle amid slowing global and domestic slowdown.’ What a sad commentary on the budgetary framework," he tweeted.

West Bengal finance minister Amit Mitra, said “a deep recession is knocking at the doors of the country", IANS reported.

In an effort to boost exports, the government is working on a new World Trade Organization-compliant duty reimbursement scheme that will replace the existing one in phases. The commerce ministry has moved a cabinet note regarding this to allow exporters to get refund of 11 state taxes. India’s merchandise exports contracted for the first time in nine months in June, signalling that trade tensions between the US and China are impacting India.