Back to the drawing board

Subir Roy
Senior Economic Analyst

The government has announced the keenly awaited revival package for the economy to address the myriad ills that have befallen it. Not only is it an elaborate one, two more sets of measures have been promised, one of them as soon as later this week.

The first point to note is that a good bit of the recent pain could have been avoided if the wrong things had not been done and the right things done far earlier. In the former comes a range of measures announced in the Union Budget which have now been withdrawn. One of them is the ‘super rich’ surcharge imposed on foreign portfolio investors structured as trusts, which has had the effect of reversing the flow of foreign portfolio investment.

On what could have been done earlier, the foremost is the decision to ‘immediately’ issue recapitalisation bonds to infuse Rs 70,000 crore capital into the public sector banks. These have had to make substantial provisions for bad debts which have eroded their capital base. This has reduced their capital adequacy ratio, thus lowering their ability to make fresh loans that would need additional capital backup.

Perhaps an even more fundamental decision announced is that the Chief Vigilance Commissioner has asked the internal advisory committee in banks to categorise cases over loans gone bad into vigilance and non-vigilance groups. Once a section of cases has been declared as non-vigilance, officials involved with them will not be under a fear psychosis, and so have the mindset to engage with the granting of fresh loans.

Another decision which could have been taken earlier is removing the angel tax on startups which has the effect of impeding the flow of risk capital at a time when the Indian startup scene is coming of age and taking the innovation story forward. If the impediments were to persist, it could hamper innovation where it matters the most for India, and which is primarily being crafted in India — low-cost solutions affecting those at the bottom of the pyramid.

In keeping with the move to ease the flow of credit, life for NBFCs (non-banking finance companies), which had faced a terrible liquidity crunch since the collapse of IL&FS, will get more bearable. The amount of credit which the National Housing Bank can extend to NBFCs financing the realty sector will be raised by Rs 20,000 crore to Rs 30,000 crore. The policy now is to encourage banks and NBFCs to coordinate so that housing loans come through faster. The attraction of housing loans will also be raised by banks being obliged to pass on to customers the policy rate cuts. 

Another set of measures involves the micro, small and medium enterprises (MSMEs). Foremost, the relevant Act will be amended to provide a comprehensive definition of what an MSME is, so that there is no confusion whether an entity is in or out of the category. All their pending GST refunds will be disbursed within 30 days and refunds in the future will be disbursed within 60 days. (Why this could not have been done earlier is anybody’s guess.)

And what can have a long-term impact, the government will implement the key recommendations of the UK Sinha committee concerning the sector within the next 30 days. If this really comes through in letter and spirit, it will greatly improve the ease of doing business for the sector. And when MSMEs are able to function with greater ease, both incomes and jobs near the bottom of the pyramid will get a boost, enhancing the feel-good factor across the board.

In keeping with the focus on improving the ease of doing business, the government has reclassified 16 offences under the Companies Act as compoundable so that violations coming under them can be settled with the payment of a fine. In the same vein, the government has responded to a key criticism across the board of the move to criminalise offences for non-fulfilment of corporate social responsibility (CSR) obligations, by declaring that these will now be treated as civil transgressions. Additionally, if your CSR project is running late, fear not, the delay will be treated leniently. 

As the economic slowdown has hit the transport sector (it has deep linkages with the rest of the economy) the most, several measures have been announced to ease its pain. Beginning with itself, the government has lifted a ban on its departments on replacing old vehicles. In a move that will give an immediate fillip to vehicle purchase decisions, BS-IV vehicles purchased till March next year will be able to run for their entire registration period. Plus, depreciation on all new vehicles purchased till March next year has been doubled to 30 per cent,  and the higher fees for one-time vehicle registration will not come into force till June next year.

One can go on with the laundry list of announcements, but two points stand out. One, there does not seem to be anything for farmers when it is their distress — caused by the inability to get a proper price for their produce to cover the cost of farming — that lies at the root of the present slowdown. Such is its ramifications that even the sale of biscuits has been affected.

Plus, despite all that the government does to undo some of the things that it had done earlier and undertake fresh positives, the global economy is in a slowdown mode. There are fears over a recession hitting the US and the consequences of an escalating trade war between the US and China. These will impact India. Hence, there is a need to take a focused look on improving the ease of doing business for exporters. Farmers and exporters, as also the rest of us, will wait for what the promised additional measures hold.