Official Reforms and India’s Real Economy, Pt. 1

By Sunanda Sen, guest blogger

Part one of a three-part series, a version of which was published in Economic and Political Weekly on September 21, 2019. 

That the Indian economy is currently experiencing a slowdown is more than evident, both with the deliberations in different private circles and with official statements signalling a series of remedial measures, mostly focussed on the ailing financial sector. However, as we point out, the ailing Indian economy has concerns that go beyond flagging GDP growth and the ailing financial sector.

Downturn in the economy

As for the downturn, the country’s GDP growth rate has plunged into a low of 5% in the first quarter of the current financial year 2019–2020. The drop has been accompanied by sharp decelerations in the manufacturing output and a sluggish growth of output in agriculture. Matching both, ‘consumption growth’ has also been weak.

A fact which remains less highlighted in current official concerns includes unemployment, at 7.1% of the labour force during September–December 2018 as reported in the Labour Force Periodic Review. Unemployment has been even higher for urban youth during the period, at 23.4%. Information as is available indicates on-going spread of job cuts in different manufacturing units and wide-ranging distress in rural areas with farmer suicides, which causes added concern.

There also are recent reports of a shrinkage in labour force participation ratio (the proportion of people who are willing to work), indicating tendencies of withdrawal syndromes on part of the unemployed—which have been largely in response to the grim employment prospects. Distress is further manifested in the large numbers of poverty stricken people—both in rural and urban areas—ranging from 22% to 29% of aggregate population according to different estimates.

The grim facts relating to unemployment and poverty in the real economy of India make it evident that a drop in GDP growth is not just a matter concerning the dampened financial markets and their volatility. Downturns also speak of the real sector—of the dearth of sustainable jobs and the related poverty.

Looking at the prevailing concerns in India for the stagnating economy, analysts often ruminate on the steep drop in stock prices in India’s secondary market which started with the end of the temporary euphoria at end of the national election in May 2019. One may recall the shooting up of the Sensex beyond 40,000 on June 4, 2019, far surpassing 37,000 on May 13. The index, slumping back to a low of 36,855 on August 30, has, at the time of writing, abruptly shot up, nearing 39,000, which is a response to the magic wand of the tax bonanza announced on September 20. Causes cited for the earlier downfall include the volatile net flows of Foreign Portfolio Investments (FPI)—recording outflows of the equivalent of US$530 million or above in a single month of July 2019. Above went along with the simultaneous drop on India’s foreign exchange reserves by nearly US$1 billion between July 20 and July 26, 2019.

Policy measures announced

Concerns relating to the stagnating GDP growth and financial markets in the country has prompted the government to announce a series of measures since the recent official announcements started on August 23, 2019. The measures included a scrapping of the surcharges on long and short term capital gains as were earlier proposed in the last budget; in a bid to help inflows of foreign portfolio investments. A few stimulant measures as suggested include an investment package of US$14 billion on infrastructure, a US$1 billion liquidity injection to recapitalise banks and cheaper loans to facilitate property market and auto sector, along with a promise of additional purchases by government departments in auto market. Corporates have also been assured of a no-penalty clause if they fail to comply with the corporate social responsibility (CSR) clause, originally designed to help the underprivileged. Included in the package are also additional roll-backs, of taxes on the ‘super rich’—as introduced in the last budget—in income slabs over US$290,000 and beyond US$700,000.

Government announcements on August 30, in the next round, relaxed several rules on single-brand retail, contract manufacturing, coal mining and digital media for FDIs. Another important measure has been the dilution of the current 30% domestic sourcing norms for single brand retail trading in the country.

Official announcements on August 30 also related to the mergers of public sector banks, by combining the ‘bad’ ones with the stronger ones, thus reducing the total number of PSBs to 12. The move is supposed to coordinate with the promised recapitalisation plan of US$1 billion, as announced at end of the previous week.

Finally, a big tax bonanza, with rates cut from 30% to 22% has been mentioned on September 30. Above, according to a credit rating agency, Crisil, amounts to a tax savings of US$5.3 billion for the 1,000 listed corporates. By the same estimates, the expected aggregate tax loss for the government amout to US$200,000; which, incidentally, exactly matches the sum received by the government from the Reserve Bank of India. Remedial official measures, addressed to mend the on-going regressive impact of the Goods and Services (GST) tax on the economy, are also on the cards, with several cuts in this indirect tax on specific items.

Pt. 1 of 3

Sunanda Sen is a former professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.

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