Nirmala Sitharaman’s dosage won’t cure the Indian economy’s paralysis

Economy
Reading Time: 13 minutes

As the GDP growth has fallen to 5.8% in the last quarter (Q4) of financial year (FY) 2018-19 from 8.2% in FY 2016-17 — after demonetisation got the best of it — and it’s anticipated that the GDP growth of the Q1 of FY 2019-20 will further fall by 0.2 percentage points to 5.6%, when Moody’s Investors Service revised its India’s GDP growth forecast for 2019 calendar year to 6.2% from the previous estimation of 6.8%, when it reduced the estimate by a similar measure to 6.7% for the 2020 calendar year, when the big comprador capitalists, excluding the big donors of Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), started a cacophony of protests against the government’s step-fatherly attitude, when even NITI Ayog’s Rajiv Kumar, one of the Modi’s ardent loyalists, accepted the precarious situation prevailing in the economic front, then Finance Minister Nirmala Sitharaman had to come out with a wide gamut of proposals to revive the economy. Unfortunately, none of them sounds promising enough.

The policies of the Modi regime, since its inception in 2014, have aimed at promoting the interests of a chosen group of big comprador capitalists at the cost of agonising others, who despite having supported Modi’s rise to power didn’t bat for the BJP as vociferously as Gautam Adani, Mukesh or Anil Ambani have. This has created a virtual monopoly of the Adani and Ambanis on the economy as well as the big credits that the public sector banks (PSB) provided to the corporate sector. The unequal battle, the tightening of the tax noose on the capitalists who aren’t in the BJP’s good book for their past association with the Congress party and the gradual decline in people’s purchasing power since the Modi regime unleashed the biggest shock to the economy through demonetisation, which served no purpose than providing the US government’s USAID organisation with an ample opportunity to experiment the repercussions of pushing cashless transactions in a predominantly cash economy, collectively contributed to the immense economic crisis the country is in right now.

What India is going through at present, which the press is calling “slowdown” and “meltdown” to avoid using the correct term that’s economic depression, can’t be simply reversed with some sops and cosmetic policy measures. India is going through an economic depression and even if one subscribes to the basics of Keynesian economics, they will see what’s taking place is caused by what John Maynard Keynes himself called “animal instincts”. The economy’s performance didn’t infuse any real hope or encouragement among the big capitalists, who, rather than reinvesting their profits in expansion or new ventures that could create employment, are hoarding money and sitting on it waiting for the best opportunity to come in the form of one or the other “bubble” that drives capitalist speculative investment anticipating higher returns. India has no bubbles left; even its dominant real estate sector is going through a sluggish period right now.

The steps Sitharaman declared are far incompatible to deal with the major challenges that the Indian economy is facing right now. With unemployment at a four-decade-high, jobs in both public sector unit (PSU) and private sector reeling under the sword of Damocles in utmost uncertainty, the major problem of the Indian economy is the fall of demand caused by a fall in purchasing power, which is topped by a conservative approach to lending by the PSBs as their non-performing assets (NPA) are on the rise due to increasing bad debts caused by the corporate sector’s reluctance to repay and their tycoons’ practice of fleeing by siphoning off public money. 

Rather than dealing with the challenges of unemployment and low demand through a systematic increase in government spending to generate demand by providing employment opportunity, Sitharaman pushed the ball to resolve the impasse to the corporate sector by providing them with a wide gamut of benefits, which would eventually increase their profitability in the long run without any compulsion to reinvest money to generate new income opportunities. 

The major measures announced by Sitharaman during her press conference on 23 August are:

1. Rs 700 billion recapitalisation of PSBs

Sitharaman announced recapitalisation of the PSBs up to Rs 700 billion and claimed that it will boost their lending capacity and improve their liquidity situation. She said that this move will generate additional lending and liquidity to the tune of Rs 5 trillion. 

When announcing this step, she forgot to mention that a few years ago, her predecessor, late Arun Jaitley, also infused more than Rs 250 billion into the PSBs to improve their lending capacity, still, the banks, under the new mechanism of arresting and resolving the NPAs, reduced their lending capacity significantly. Now by pushing the banks to lend more without putting a proper system in place to recover the NPAs from the corporate sector, especially the big comprador capitalists like Adani and Ambanis, the finance minister is actually worsening the situation. 

The PSBs need less government interference or influence on their lending decisions, while at the same time a strong vigilance to ensure that they aren’t lending to unscrupulous business houses or neglecting the priority sectors like farmers, micro, small and medium enterprise (MSME) and marginalised communities from access to funds. Why the government’s MUDRA scheme or the Startup India scheme failed to reach their targets? They failed due to the sheer anti-people policies imbibed in the culture of the Indian banking sector’s lending processes. If Sitharaman in recapitalising the banks, then it’s also imperative to bring a clearcut lending policy for all banks to adhere to. 

Can Sitharaman guarantee that the Modi regime will not interfere or influence the lending decisions of the PSBs? Can she and the government stop acting as the servile agents of the big comprador capitalists like Adani and Ambanis, and their foreign masters? The BJP can’t retain its hegemony over Indian politics without providing the opportunity to carry out unbridled loot and plunder of resources and finances by the big corporations that fund them, hence, Sitharaman’s decision to infuse capital into the PSBs will help the other capitalists less and provide more impetus to the BJP’s staunch backers.

2. CSR violation not to be treated as a criminal offence

Sitharaman assured the corporate houses that any violation of the rules regarding corporate social responsibility (CSR) according to the amended Companies Act, 2013, will not be treated as a criminal offence and the corporate houses will not have to face severe penalisation for not meeting the CSR norms.

According to the amended Companies Act, 2013, a certain class of profitable companies is required to shell out at least 2% of their three-year annual average net profit towards CSR activities. Though the CSR has provided an optimum opportunity to the big corporate houses to fiddle with policy and decision-making processes of the state machinery by funding major lobbyist groups, think tank foundations, etc, the policy of criminal prosecution for violation of the CSR norms bothered the big capital immensely. They opposed the mandatory provision of shelling out 2% of their three-year annual average profit for CSR. Now, the government has ensured that they have to face a civil suit for violation and it means the so-called mask of “giving back to the society”, which was used to market corporate philanthropy, is now formally off.

How this move will revive the economy? Did the CSR norms and penalisation cause massive job loss and pessimism in reinvesting in major ventures that could create employment opportunities?

Even Sitharaman knows that it’s not the case and this non-criminalisation of CSR violation will not encourage the corporate sector to invest more in job-creating business ventures, rather, due to severe uncertainty that’s rampaging in the stock market and money market, most corporate houses will sit on their cash and not move the money anywhere fearing loss. With less compulsion to invest in the CSR function now, these companies will sit on a huge cash reserve than before and it won’t help the economy a bit.

3. Enhanced FPI surcharge rollback

In her maiden budget as the Union finance minister, Sitharaman had levied an enhanced surcharge on foreign portfolio investors (FPI), which caused immense trouble for the stock market where 90% brokers are hardcore Hindutva fanatics. The negative impact on the FPI caused a huge amount of pullback from the domestic equities since the budget. This triggered disgruntlement in the stock market and the BJP sniffed problem.

Data shows that FPIs have pulled out Rs 230 billion from domestic equities in July and August 2019, as the Union Budget proposal to levy a surcharge on higher tax-income groups affected 40% FPIs, who have been investing in the Indian equities.

Sitharaman didn’t clearly utter why her budget proposal first imposed the excessive surcharge on the FPIs under the higher tax-income groups and then suddenly rolling back the proposal? Did her ministry conduct any in-depth study of possible reactions of FPIs in case of a higher surcharge? How did she or the Modi regime thought that the FPIs would shell out more money when they have the option to quit?

This act of helping the FPIs will eventually not help the common people but the stockbrokers. It will help the speculative stock trading to shoot up, however, won’t generate employment or increase people’s purchasing power, which are major contributors to the economic crisis in India.

4. Automobile sector sops

Sitharaman announced a host of measures, all cosmetic though, for the automobile sector, which faced an immense crisis in this crisis season. She assured that the BS-IV vehicles bought before 31 March 2020 will remain operational for their full period of registration. Further, Sitharaman also deferred the decision to hike the one-time registration fee on vehicles till June 2020. 

Although these measures will appear as a pro-auto industry plan, they can’t pull up slumped sales of the automobile industry. The major challenges in the auto industry are the feeling of pessimism that’s influencing consumer decisions and a higher GST on vehicles.

The sale of the automobiles, especially two-wheelers, dipped considerably and reached its 19-year-low nadir in 2019. The automobile sale across slumped by 18.71% to 1.82m units in July 2019 from 2.24m units in the same month last year.  

The Society of Indian Automobile Manufacturers (SIAM), gives out wholesale figures — ie, the number of vehicles dispatched to automobile dealers by their manufacturers. According to SIAM, the passenger vehicle segment, including passenger cars, utility vehicles and vans, has been one of the worst-performing segments in the automobile industry; this segment experienced a nearly 31% drop in sales vis-a-vis July 2018.

Except in October 2018, when there was the pre-Diwali purchase spree, the segment didn’t see any growth despite many new models launched and offers given to customers. The fall in demand caused over 215,000 jobs being axed in this particular sector. 

Over 15,000 people lost jobs due to closure of 300 automobile dealership and around 30,000 casual workers from different sectors of the automobile industry also lost their jobs in this year alone. At this point in time, the automobile industry’s crisis is fuelling far more job cuts, at least a million if not more, which can’t be arrested by Sitharaman’s empty phrases and assurances. 

The major demand of the automobile industry is the reduction of GST from 28% to 18% to ensure a surge in demand during the festive season. The industry also demands a proper automobile scrapping policy from the government to boost the demand. Sitharaman remained non-committal on these issues. The liquidity problem of the non-banking financial companies (NBFC) is also a major problem as with the banks becoming conservative in lending, the demand of NBFC credit increased, yet the failure of the sector to meet the growing demand for credit due to tightening of purses affected the auto industry immensely.

Sitharaman’s cosmetic measures will not affect the demand as the lack of credit facility, the introduction of the BS-VI variants from 2020 onwards, and the higher on-road taxes will severely impact industry demand. Even if the Diwali season in October may help the automobile industry to revive itself, it will eventually continue to suffer due to the crisis rest of the time.

5. RBI rate cuts to pass on to the consumers

To help the consumption grow through credit access, Sitharaman said that the government will help to pass the Reserve Bank of India’s (RBI) rate cuts to the consumers. She said through a reduction in the Marginal Cost of Funds Based Lending Rate (MCLR) the benefit of RBI’s rate cut will pass on to the consumers. At present, State Bank of India — the largest PSB — has an MCLR of 7.90% on overnight tenure to 8.45% on three-year-term. What will be the revised MCLR on the current rate is not defined. If it’s left on the banks to decide and come up with their own revised rates, then too, in order to meet their NPA reduction target the banks will continue with their conservative lending practice and it will preserve the status quo in the financial sector.

6. “Angel Tax” provision to be removed

The provision of Angel Tax on the investors of startups was called a hindrance to investment by the Indian capitalists. This made Sitharaman declare that the Angel Tax provision will be abolished to help the startups flourish and thereby increase employment opportunities. 

Now, even if we consider it as a positive step, the major question will remain on the sustainability of the startups that have mushroomed and then withered away. How can they become job providers when most of them work on a shoe-string budget and can provide very minimal employment opportunities? 

Earlier, throughout 2018, the Modi regime claimed that the MUDRA scheme created millions of self-employment opportunities, while according to the former finance minister and the BJP’s former leader Yashwant Sinha, the entire average loan amount of this scheme had been around Rs 7,000 and at present most of the banks aren’t providing loans under this scheme. Similarly, most of the startup enterprises, even the bigger ones, that opened under Modi’s ambitious scheme of Startup India, failed to make an impact on the economy.

According to a study report analysed in The Times of India, out of 33,000 startups surveyed, 80% said they didn’t receive any support from Startup India, and 50% said that the single biggest challenge to the startups is corruption. Without dealing with the bureaucratic hurdles, it’s unwise to abruptly provide an Angel Tax holiday.

Now with no Angel Tax, the startup option will be used to park capital and do money-laundering by unscrupulous entities, while there will be no employment generation or substantial contribution to the GDP by these startups.

7. GST Refunds for MSMEs

The finance minister told the press that the MSMEs will get all their pending GST refunds within 30 days. Also, all GST refunds of MSMEs will be paid within 60 days from the date of application. Sitharaman added that the decision on recommendations of the UK Sinha Committee regarding ease of credit, marketing, technology and delayed payments to MSMEs will be taken within 30 days. 

But, she didn’t clear the air that the major crisis of the MSME is not due to the filing and returns of GST, which has additional costing and indeed is complicated for many enterprises. In the MSME universe, the imposition of GST itself is a big existential crisis as they have to compete with big corporates, foreign and domestic, and at the same tax rate.

For the real help to the MSMEs will be tax exemption or a lower tax rate for their business, which would eventually help them serve more customers and thereby increase their profitability and also help them grow fast. Moreover, while obliging the World Trade Organization’s (WTO) diktats, as the Indian governments since the time of Atal Bihari Vajpayee opened the reserved sectors for MSME and cottage industry to foreign players, the MSME sector started suffering extremely. 

It’s indeed very important to have the MSME sectors enjoy some sort of protection by fighting against the WTO aggression on these sectors. However, expecting such a thing from the Modi regime, a servile lackey of the imperialist system represented by the WTO itself, will be quite infantile. So, there will be no relief for the MSME sector at all.

8. Centralised tax notices to stop Income Tax harassment

The finance minister dealt with the complaint of “tax terrorism” raised by a host of capitalists, including their own supporters following the harassment by Income Tax Department’s officials. She said that from 1 October 2019 onwards a single, centralised, computerised system will be used to issue tax summons, challans and letters. No individual officer will be in a position to harass the taxpayers.

Knowing well that the entire Income Tax Department is surviving on tax harassment and bullying, Sitharaman ignored the necessity of developing an anti-corruption mechanism that will put checks on the Income Tax officials’ behaviour and their activities to ensure compliance with norms. She didn’t clarify why the officials are adopting unfair means and harassing the capitalists, even when the Modi regime swears allegiance to them? 

As we can see, the above measures fall far short to meet the actual goal of preventing a major economic catastrophe towards which the Indian economy is progressing. There is no scope of the economy healing itself by waiting for the dust to settle, as there is no such scope in the funnel. The self-healing option is not going to work as the condition will worsen in the days to come and within India’s present socio-economic setup, it’s impossible to resolve the crisis through bureaucratic measures.

To at least safeguard the people by providing them with a consistent source of income and to revive the economy to some extent, it’s important to increase public spending on employment generation. This is nowhere on the agenda of the Modi regime. Rather, ignoring the plight of the people and an ever-increasing four-decade-high unemployment ratio, the Modi regime has given green signal to a broaden the loot and plunder of the country. It has been cutting the allocation to the National Rural Employment Guarantee Act (NREGA), which provides work for 100 days to the rural poor. The plan to kill the NREGA has also added fuel to the fire of the economic crisis. It’s time that the NREGA is broadened and is made to provide at least 180 days of work opportunity to the rural poor to end rural distress.

In the last few months, ever since returning to power with a landslide majority in the last election, the Modi regime is on a withdrawal spree, taking out a huge amount of money from all government reserves. In July, the Modi regime withdrew Rs 98.18 trillion from the Consolidated Fund of India (CFI), followed by a withdrawal of Rs 1.76 trillion from the RBI’s reserves and there are also apprehensions that the government may take surplus from SEBI to fill its Contingency Fund. At the time of extreme economic distress, if the government is withdrawing money that’s equal to its five years’ revenue to meet the expenses of a single financial year, then the vexing alarm is heard loud enough. None of this money is utilised in the revival of the PSUs or public expenditure to create jobs and increase demand. Rather, much of the money will be diverted to meet the costs of prime minister’s flagship projects and in defence overhaul as India enters a verbal spat with neighbouring Pakistan over Jammu & Kashmir. It won’t be a wonder if Modi decides to start a military conflict with Pakistan to distract people’s attention from the burning issues.

Other than managing the economy, the finance minister is busy doing everything else and commenting on everything under the sun to hail her boss. Now, the big question is how would a nonchalant finance minister, with a department full of sycophants, resolve this major economic crisis that has created an impasse with the help of a non-economist RBI governor, a government PR mouthpiece NITI Ayog, and a bunch of other clueless ladies and gentlemen? What’s the plan? How would any pro-active public spending happen to ensure a tectonic shift and a gradual boost of demand with an increase in the people’s purchasing power? 

At present, there is no visible effective solution in the books of the government and the finance minister’s team is waiting for the crisis to heal itself, ignoring the fact that it’s not merely a side-effect of the global recession at this point in time, rather, it’s a purely Indian problem caused by the internal and external factors that reduced people’s purchasing power and also curbed the credit system’s effectivity. It’s time for a major rejig in the way the economy is managed to preserve jobs, create more employment opportunities, increase people’s purchasing power and building an inclusive and egalitarian growth story. None of them can be on Modi’s agenda as it’s merely about using everything under command to help a chosen group of crony-comprador capitalists to profiteer by plundering resources, evading taxes and flouting rules, all these while incessant blabbering on becoming a $5 trillion economy. Thus, to save the economy, it’s imperative to dislodge the corporate-lackey Modi regime and establish a democratic, progressive and pro-people government that can restructure the economy to suit the needs of the Indian people and not appease big corporations or the institutions like World Bank, International Monetary Fund, WTO, etc. If the struggle to establish such a pro-people government isn’t strengthened then the Indian economy will fall deeper into the abyss of sheer crisis and trigger massive poverty, unemployment and a major socio-economic catastrophe in the days to come.

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