TAX CUTS NEEDED TO BOOST DEMAND, SAY ECONOMISTS

Experts say these fresh measures will take a lot of time to move the needle for the economy

Direct economic stimulus measures such as tax cuts for individuals and industry would have helped prop up the economy which was hit hard by the lockdowns, say economists and corporate leaders. While the measures announced on Monday are focussed more on the supply side, these steps would take a lot of time to move the needle for the economy, they said. The loan guarantees may help businesses borrow on favourable terms but there are hardly any new projects by Indian firms — barring a few by top steel companies, they said.

Direct economic stimulus measures such as tax cuts for individuals and industry would have helped prop up the economy which was hit hard by the lockdowns, say economists and corporate leaders.

While the measures announced on Monday are focussed more on the supply side, these steps would take a lot of time to move the needle for the economy, they said.

The loan guarantees may help businesses borrow on favourable terms but there are hardly any new projects by Indian companies — barring a few by top steel companies, they said. “The direct relief measures are good as they help support the poor or farmers. In the case of health, building facilities takes time and will benefit in the medium to long run. Direct action through tax cuts would have propped the economy, but that has not been done. The focus even last year was on the supply side where an enabling environment has been created. But in these tough times, direct action would be more effective,” said Madan Sabnavis, chief economist at CARE Ratings.

A research report by Sbi-ecowrap on relief measures said, “The fiscal impact of announcements made today (Monday) and earlier is not linear as a substantial portion of the package is contingent liabilities. Ignoring this, the immediate impact will be slightly more than ~1.23 trillion, which will be around 0.6 per cent of the GDP.”

The finance minister also announced additional measures to provide greater financial support to sectors impacted by the pandemic. Experts feel these steps build on previous packages, and include small loans and specific assistance for the tourism sector. These initiatives could help improve credit flows to small firms, and MSMES.

But there was no direct package for sectors such as airlines, airports, malls, offline retail and hotels — which saw a total collapse of their businesses.

“These relief measures are well targeted and will provide some relief to the stressed sectors. But it will not be enough, given the hit to the economy. I think direct income or cash support is also required at this juncture, particularly for the urban poor,” said D K Joshi, chief economist, CRISIL.

“What is needed is direct cash support, particularly to the worst-hit sectors, including hospitality. Though they have given some incentives there but don’t know how it will play out. I think the government has limited fiscal space for mega support. My sense is that the government wants to support the economy via investment and not via consumption boost, as public investments have still held up. I expect that they would be required to do more spending this fiscal than what is being envisaged,” he said.

Aditi Nayar, chief economist, ICRA, said free food grains will help the bottom of the pyramid, and aid in retaining labour in urban areas.

“However, the government may also be required to consider a reduction in fuel prices as it would help dampen the inflationary pressures. Lower fuel prices would also ease the pressure on disposable incomes, allowing for a modestly faster revival in consumer sentiment and spending," she said.

TV Narendran, president of the Confederation of Indian Industry (CII) said the ECLGS (emergency credit line guarantee scheme) has been a successful intervention with the sanctioned amount standing at ~2.69 trillion so far. The extension of its scope and coverage are expected to provide significant support to the cash flow of stressed sectors.

“The tourism sector has been one of the most impacted sectors, with the second wave having exacerbated its duress. With a significant contribution to both GDP and employment, the economic relief package announced for the tourism sector will usher in the much-needed liquidity and help revive this employmentintensive sector,” said Narendran.

The chief executive officer (CEO) of an airline said direct financial incentives for the sector would have helped. Several airlines have laid off staff across India or are giving truncated salaries. "It will take at least a few years for the airlines and hotel sector to come back to profitability," the CEO said.

Though a ~1.1 trillion loan-guarantee scheme for Covid-affected sectors was announced, this will not be enough as of this ~50,000 crore has been allocated to the health sector and ~60,000 crore to other sectors.