HOW TO STEADY A WOBBLY ECONOMY
Prescriptions from top experts in business, economics, politics and taxation
Budget 2020 will be presented in the shadow of one of the
longest spells of slowdown — six quarters so far — in more than two decades. That poses a host of challenges for Finance Minister Nirmala Sitharaman as slowing tax collections have left practically no leeway for fiscal stimulus out of the government’s balance sheet. On top of that, exports have stagnated, private investment has ground to a halt and consumption is still reeling under the effect of demonetisation, GST, lack of jobs and public sentiment. Just public expenditure seems to be driving the economy for now.
Business Today hosted a Pre-Budget Panel Discussion to debate how to steady a wobbly economy. The panelists were Gopal Krishna Agarwal, National Spokesperson of BJP on Economic Affairs; Sumant Sinha, Chairman and Managing Director, ReNew Power; Rahul Garg, Senior Partner, Tax and Regulatory, PwC India; D.K. Joshi, Chief Economist, CRISIL; and Dinesh Kanabar, Founder and CEO, Dhruva Advisors. The discussion was moderated by Rajeev Dubey, Editor, Business Today. Edited excerpts: Rajeev Dubey: How do you see the economy in 2020? We are in the middle of one of the longest spells of slowdown – six quarters and counting.
Sumant Sinha: The ongoing slowdown is partly cyclical and slightly structural. Several things have happened over the past one-and-a-half years that hit economic growth. But now when I look at metrics coming out, my sense is that we are bottoming out. In automobiles and power demand, the rate of deceleration has decreased. We’ll see a pick-up. On the headline rate, economic growth will be better in 2020. How much better, only time will tell.
The government has taken several measures that are long-term in nature. It is not as concerned about shortterm results such as fiscal stimulus, as it is to get the economy structurally back on track. It will take time. One key metric moving in the right direction is NPAs (nonperforming assets). It’ll put more money in banks. And with the decline in provisioning, we will see more lending from banks. This will have a big impact on the economy. Coupled with front-loaded investment programmes
(the recent infrastructure announcement), we should be looking at better economic growth going forward. Finally, if global factors are supportive, we’ll see faster growth; otherwise it will hover around 6 per cent.
Gopal Krishna Agarwal: Challenges are always there in the economy. The government handled legacy issues between 2014 and 2019. At present, macroeconomic parameters are fine. We are in a position to leap forward.
There are global issues, too. Petroleum prices, ChinaUS trade war, for example.
The government is focussing more on domestic demand. Export-oriented growth model may not work for us. We have to preserve our domestic market. The government has made structural reforms such as RERA and GST. We are moving fast on digital platforms also — RuPay, BHIM, FasTag. I accept that there are some implementation challenges. Once these are tackled, the economy will move ahead.
There are twin risks in the economy. We have tackled the supply side of credit availability through bank reforms (restructuring, recapitalisation, focus on repo rate), but it is not sufficient. There are risks from lenders’ point of view too. The government is trying to meet consumer demand through infrastructure investment, but investment zeal is required from the private sector too. The economy cannot run on government investment alone.
Borrowers and lenders both are risk averse. We are working on decriminalising Company Law, changing the Insolvency and Bankruptcy Code (IBC) and bringing the FRDI (Financial Resolution and Deposit In
surance Bill) resolution mechanism on financial institutions. Negotiations on RCEP (Regional Comprehensive Economic Partnership) and FTA (free trade agreements) are going on. The government is open to suggestions.
Rahul Garg: Economic indicators show that the growth is not as good as it could be for a country like India. The growth rate may still be acceptable by some global standards, but not by the standards that India aspires for its economy. On a structural basis, fundamental things have been done over the past six quarters. So, we shouldn’t get impatient. Seeing a plant everyday doesn’t make it grow any faster. If you nurture it well, it will become a strong tree. A balance between long-term and short-term is needed. The balance in the current regime is leaning towards long-term. There is a lag, but with some supportive measures, we should be able to create a strong base to catapult to the next level.
D.K. Joshi: Let me point out three indicators which are turning a tad positive. The PMI for manufacturing at 52.7 in December was the highest since July. And the fact that food inflation has started rising itself is bad news from interest rate perspective, but good for farmers. The terms of trade for the farming community are becoming somewhat more favourable. The third factor is that the pace of deceleration in auto sector and exports is slowing. If you combine all these, it gives a sense that things are somewhat improving. But the picture on many other parameters remains hazy.
The pace of recovery in 2020 will be very weak. I don’t think it’s going to test the levels of 7 per cent (the trend rate of growth) any time soon. The financial sector is going through a clean-up phase and the cost of that is slow growth. We experienced that in the late 1990s and early 2000s. The two key instruments for firing up the economy —monetary and fiscal policies — have little juice. So, there’s little space for the government to spend its way out of the slowdown next year.
The monetary policy is not effective as transmission is weak and banks are not willing to lend. The reason for that is weak sentiment and risk aversion. Unless these are sorted out, a strong recovery is unlikely.
The 2019/20 GDP is expected to be around 5.1 per
”On private investment, company law needs immediate de- criminalisation. The (Company Law) Committee has given its report with 46 recommendations”
Gopal Krishna Agarwal, National Spokesperson of BJP on Economic Affairs
cent. So the base is very weak. That will give a statistical boost next year.
In the medium-term, there are three drivers that are emerging. The corporate sector has deleveraged. It will continue to do so. And with the corporate tax rate cut, whenever the cycle turns, their ability to push investment would be better.
The second driver is the banking clean-up. The ability of the financial sector to lubricate the rest of the economy would improve.
And finally, the reforms such as GST have not added to GDP so far; once that is streamlined, it can lead to efficiency-led spurt in growth over the medium run.
Dinesh Kanabar: There are two parts — what the numbers such as GDP are talking about and the other is sentiment, that is, if the investment cycle is reviving. Recently, I happened to converse with promoters of two large conglomerates who are in steel, power, coal etc. They said they expect the next quarter to be better. If there is definite improvement in sentiment, I see hope. While some companies are yet to take advantage of the corporate tax cut to 25 per cent, they will soon move to the new regime. It will release more funds.
Besides, the effective tax rate of 17 per cent for manufacturing companies is attractive enough for many US multinationals facing heat in China to move their manufacturing base to India. Through IBC, a great platform, cases such as Essar and Ruchi Soya have put smiles on the faces of bank CEOs. Dubey: Can we trigger growth through the four engines of the economy — exports, consumption, private investment and public investment — considering the first three are dysfunctional?
Garg: In exports, the global economy will stay like this for some time. But that does not mean that we cannot push exports further. The reduction in the tax rate to 17 per cent, hoping that American and other western companies would get attracted to do in India what they were doing in China, is a good bet. There can be state-Centre level coordination to create clusters. That would not be short term; it may be mid-term and a good way of promoting exports, because you have provided an economic playing field in the form of lower taxes. If you are somehow able to offset the higher cost of doing business in India by clustering the place together, you may be able to raise exports, not necessarily those led by Indian businesses, but those led by investments.
In public investment, we need to
”My sense is that we are bottoming out. We’ll see a pick-up. On the headline rate, economic growth will be better in 2020”
Sumant Sinha, Chairman and Managing Director, ReNew Power
focus on where the multiplier is higher and keep the balance right, be it agriculture, tourism or construction. But where are the funds for public investment? Relaxing FRBM (Fiscal Responsibility and Budget Management Act) could be considered.
In private investment, what is the sentiment? Longterm confidence is needed. Currently, beyond the policies, there are so many things on the ground where the confidence of business is shaken. Look at the recent announcement of the government on the corporatisation of ordnance factories. The whole thing is such a mammoth exercise. Everybody in any industry can participate in the projects rolled out. There is a good opportunity and market but the sentiment has to change so that people move into these with confidence.
India has a great consumption story. Having tackled many things from the supply side, this Budget will also look at things from the demand side. You need to leave money with the people rather than with the government. If DDT (dividend distribution tax) goes away, you have 20 per cent more money with the people who are shareholders. But, private investment also depends on the rigour of implementation of the plans.
An area where India has great potential is to be a financial services or a services hub. Whether we are able to export the manufactured goods or not, we can definitely export services. We have the track record of IT services. We can do it for financial services and other services as well. When the global services of a company are being rendered from India, especially from the management side, do those companies become liable to pay taxes in India? Making India a services hub for exports is a good bet. We have an amazing number of programmes for start-ups.
Dubey: Are you suggesting a tax cut?
Garg: No, not tax cut. It is basically about leaving money in the hands of people. Change in tax slabs is one option. At the time of paying tax, a person should be able to exercise his option of making an investment in government bonds, or paying taxes.
In indirect taxes, we are not in a position to reduce the tax rate. Instead of multiple tax slabs, look at combining some of them. This month over April (April-December 2019), there has been an 11 per cent increase in numbers — this is a great sign that even when tax collection has not increased, the tax payer base for indirect taxes has increased. Some of this is partly fuelled by GST bringing in more transactions into the tax net.
Agarwal: On the export side, we need to renegotiate many of the FTAs. They have definitely created certain problems for domestic industries—small, medium and large. They have to be renegotiated. We should look at the way Chinese manufacturing is shifting so that our domestic industry can grow into the global and regional supply chain. We have to develop clusters of industries which can integrate because now the industrial structure across the globe is more of a collection of various countries.
On public investment, disinvestment has to be taken. There is no alternative. If you talk of Air India, the problem is not that it can go through IBC; it has a debt of more than ` 50,000 crore. The issue is who will take that cut? If you remove debt from Air India, it has a full chance of being a viable, running airline. IBC is effective only if an entity is interested in running the business. If IBC is seen as an instrument to recover money, it will fail completely. Public investment will come through disinvestment and fiscal expansion.
On private investment, company law needs immediate de-criminalisation. The (Company Law) Committee has given its report with 46 recommendations. The sentiment in the private sector is being hurt because white collar activities are being made into criminal activities.
The bond market is required because we don’t have private capital. Only bank loans will not help. The focus of the whole financial sector is only on equity markets. Globally, financial markets have more vibrancy with bond markets.
Private investment can come through a level playing field. But land is an issue. Cost of land is too high. In our projects, 50-60 per cent of the cost is land.
Joshi: There are three sets of factors that are responsible for slowing exports. One is the global environment which is becoming more inward looking and outside our control. Two, we’ve lost competitiveness. Three, GST has also created hassles for exporters, particularly because of the refund issue. That hit hard because of the tight liquid